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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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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
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Web page: http://www.socialsciences.uottawa.ca/eco/eng/index.asp
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  1. Patrick Rey & Thibaud Verge, 2002. "Bilateral Control with Vertical Contracts," The Centre for Market and Public Organisation 02/048, Department of Economics, University of Bristol, UK.
  2. 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.
  3. Schwartz, Marius & Thompson, Earl A, 1986. "Divisionalization and Entry Deterrence," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 307-21, May.
  4. Fumagalli, Chiara & Motta, Massimo, 2002. "Exclusive Dealing and Entry, when Buyers Compete," CEPR Discussion Papers 3493, C.E.P.R. Discussion Papers.
  5. Patrick Rey & Joseph E. Stiglitz, 1988. "Vertical Restraints and Producers' Competition," NBER Working Papers 2601, National Bureau of Economic Research, Inc.
  6. Andreas IRMEN, 1996. "Precommitment in Competing Vertical Chains," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9617, Université de Lausanne, Faculté des HEC, DEEP.
  7. 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.
  8. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  9. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  10. David Martimort & Lars Stole, 2001. "The Revelation and Delegation Principles in Common Agency Games," CESifo Working Paper Series 575, CESifo Group Munich.
  11. 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.
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