IDEAS home Printed from https://ideas.repec.org/p/ecm/wc2000/1670.html
   My bibliography  Save this paper

Price and Non-Price Restraints When Retailers are Vertically Differentiated

Author

Listed:
  • Yossef Spiegel

    (Northwestern University and Tel Aviv University)

  • Yaron Yehezkel

    (Tel Aviv University)

Abstract

This paper considers vertical restraints in the context of an intrabrand competition model in which a single manufacturer deals with two vertically differentiated retailers. We establish two main results. First, we show that if the market cannot be vertically segmented, the manufacturer will foreclose the low quality retailer either directly by dealing exclusively with the high quality retailer, or indirectly by setting a sufficiently high minimum RPM or a sufficiently high wholesale price. Although vertical restraints are not needed to foreclosure the low quality retailer, the manufacturer prefers to impose restraints because they lead to a higher retail price and hence a higher profit. This result means that exclusive dealings with the high quality retailer or an RPM may have anti competitive effects. Moreover, the use of vertical restraints to foreclose low quality retailers is often justified on the grounds that it alleviates a free rider problem in the provision of special services. However since we show that foreclosure occurs even without restraints, it is clear that the benefits associated with foreclosure cannot be used to justify the use of vertical restraints. Second, we show that if the market can be vertically segmented, the manufacturer will impose customer restrictions by requiring the low quality retailer to deal only with consumers whose willingness to pay for quality is below some threshold. We show that this restriction benefits the manufacturer as well as consumers with low willingness to pay for quality, including some that are served by the high quality retailer, but it harms consumers with high willingness to pay for quality.

Suggested Citation

  • Yossef Spiegel & Yaron Yehezkel, 2000. "Price and Non-Price Restraints When Retailers are Vertically Differentiated," Econometric Society World Congress 2000 Contributed Papers 1670, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1670
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/RePEc/es2000/1670.pdf
    File Function: main text
    Download Restriction: no

    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    2. Ralph A. Winter, 1993. "Vertical Control and Price Versus Nonprice Competition," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 61-76.
    3. Katz, Michael L., 1989. "Vertical contractual relations," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 11, pages 655-721 Elsevier.
    4. Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(1), pages 57-84, April.
    5. Rey, Patrick & Tirole, Jean, 1986. "The Logic of Vertical Restraints," American Economic Review, American Economic Association, vol. 76(5), pages 921-939, December.
    6. Patrick Bolton & Giacomo Bonanno, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 555-570.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1670. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/essssea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.