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Vertical Limit pricing

  • Aggey Semenov

    ()

    (Department of Economics, University of Ottawa, Ottawa, ON)

  • Julian Wright

    ()

    (Department of Economics, National University of Singapour)

A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.

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File URL: http://www.sciencessociales.uottawa.ca/sites/default/files/public/eco/eng/documents/1104E.pdf
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Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 1104E.

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Length: 34 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ott:wpaper:1104e
Contact details of provider: Postal: PO Box 450, Station A, Ottawa, Ontario, K1N 6N5
Phone: (613) 562-5753
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Web page: http://www.socialsciences.uottawa.ca/eco/eng/index.asp
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  1. Stefanadis, Christodoulos, 1998. "Selective Contracts, Foreclosure, and the Chicago School View," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 429-50, October.
  2. Rey, Patrick & Vergé, Thibaud, 2003. "Bilateral Control with Vertical Contracts," IDEI Working Papers 202, Institut d'Économie Industrielle (IDEI), Toulouse.
  3. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  4. Schwartz, Marius & Thompson, Earl A, 1986. "Divisionalization and Entry Deterrence," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 307-21, May.
  5. Chiara Fumagalli & Massimo Motta, 2006. "Exclusive Dealing and Entry, when Buyers Compete," American Economic Review, American Economic Association, vol. 96(3), pages 785-795, June.
  6. Irmen, Andreas, 1998. " Precommitment in Competing Vertical Chains," Journal of Economic Surveys, Wiley Blackwell, vol. 12(4), pages 333-59, September.
  7. Patrick Rey & Joseph E. Stiglitz, 1988. "Vertical Restraints and Producers' Competition," NBER Working Papers 2601, National Bureau of Economic Research, Inc.
  8. Patrick Rey & Joseph Stiglitz, 1995. "The Role of Exclusive Territories in Producers' Competition," RAND Journal of Economics, The RAND Corporation, vol. 26(3), pages 431-451, Autumn.
  9. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  10. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  11. Rasmusen, Eric B & Ramseyer, J Mark & Wiley, John S, Jr, 1991. "Naked Exclusion," American Economic Review, American Economic Association, vol. 81(5), pages 1137-45, December.
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