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Market Performance Implications of the Transfer Price Rule

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  • Stephen Martin
  • Jan Vandekerckhove

Abstract

We model the impact of the transfer price rule (a constraint that re- quires the downstream division of a vertically-integrated ?rm to earn at least a normal rate of return on investment in the counterfactual case that it pays the same price as a nonintegrated ?rm for the essential input), re- jected by the U.S. Supreme Court in Linkline, for the performance of markets in which an upstream ?rm provides an essential input to a down- stream ?rm with which it may compete in the retail market by vertical integration. We allow for horizontal and vertical product di¤erentiation in the ?nal good market. The upstream ?rm?s equilibrium distribution choice (between exclusion, dual distribution, or nonintegration) depends on relative product qualities. We characterize conditions under which the transfer price rule alters the upstream ?rm?s equilibrium distribution choice, and develop conditions for the transfer price rule to improve mar- ket performance.

Suggested Citation

  • Stephen Martin & Jan Vandekerckhove, 2010. "Market Performance Implications of the Transfer Price Rule," Purdue University Economics Working Papers 1238, Purdue University, Department of Economics.
  • Handle: RePEc:pur:prukra:1238
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    File URL: http://www.krannert.purdue.edu/programs/phd/Working-papers-series/2010/1238.pdf
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    References listed on IDEAS

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    1. Stephen Martin, 2009. "Microfoundations for the Linear Demand Product Differentiation Model, with Applications," Purdue University Economics Working Papers 1221, Purdue University, Department of Economics.
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    Cited by:

    1. Justus Haucap & Torben Stühmeier, 2016. "Competition and antitrust in Internet markets," Chapters,in: Handbook on the Economics of the Internet, chapter 9, pages 183-210 Edward Elgar Publishing.

    More about this item

    Keywords

    price squeeze; transfer price rule; vertical relations; an- titrust;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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