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Vertical Price Restraints and Free Entry Under Asymmetric Information

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We investigate the impact of vertical price restraints on the free-entry equilibrium and its welfare properties in a vertically related market where manufacturer-retailer hierarchies compete under asymmetric information. We compare the legal regimes of laissez-faire and ban on resale price maintenance (RPM) under different entry decision modes. When the entry decision is taken upstream, laissez-faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the spread of demand uncertainty. Conversely, when the entry decision is taken downstream, a ban on RPM stimulates entry and consumer surplus, but laissez-faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.

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  • Leda Maria Bonazzi & Raffaele Fiocco & Salvatore Piccolo, 2020. "Vertical Price Restraints and Free Entry Under Asymmetric Information," CSEF Working Papers 564, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:564
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    More about this item

    Keywords

    asymmetric information; free entry; quantity forcing; resale price maintenance; vertical restraints;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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