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Refusal to Deal and Investment in Product Quality

In: Economic and Legal Issues in Competition, Intellectual Property, Bankruptcy, and the Cost of Raising Children

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  • Stephen Martin

Abstract

Purpose This paper investigates the impact of refusal to deal by a monopoly supplier of an essential input on firms’ investments in product quality, consumer surplus, and net social welfare. Methodology/approach The paper uses a standard economic model of endogenous quality choice for horizontally differentiated products to compare market performance with and without refusal do deal. Findings Refusal to deal increases the payoff of the integrated firm and reduces equilibrium investment in quality, consumer surplus, and net social welfare if varieties are moderate or good substitutes. If varieties are poor substitutes, the integrated firm maximizes its payoff setting a wholesale price that allows the downstream rival a small economic profit. Research/practical/social implications The analysis presented here implies that it is actual rivalry in the development of high-quality substitute varieties that promotes consumer welfare, and that such rivalry is ill served by the exercise of market power in input markets and by the refusal of vertically integrated upstream firms to deal with their nonintegrated downstream rivals. Reliance on the lure of monopoly profit to get good market performance is misplaced.

Suggested Citation

  • Stephen Martin, 2015. "Refusal to Deal and Investment in Product Quality," Research in Law and Economics, in: James Langenfeld (ed.), Economic and Legal Issues in Competition, Intellectual Property, Bankruptcy, and the Cost of Raising Children, volume 27, pages 43-66, Emerald Publishing Ltd.
  • Handle: RePEc:eme:rlwezz:s0193-589520150000027002
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    1. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
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    More about this item

    Keywords

    Refusal to deal; vertical exclusion; endogenous sunk cost; L13; L12; L22; L41;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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