Lecture 9: Vertical Integration and Vertical Restraints
Introduction
Value chain
Vertical relations
supply- demand relations: firms with final customers
upstream firms
downstream firms
intermediary market: between upstream firms and downstream firms
final market: between downstream firms and final customers
Vertical integration
transaction costs theory (in the market)
hold- up problem (example: page 9)
reasons (3)
vertical restraints (p.12): usually upstream companies imposed on downstream companies
efficiency reasons
anti- competitive reasons
Vertical externality
Bilateral monopolies
Double marginalization problem: arise when both upstream and downstream firms have market power => too high final price
example: page 16
vertical integration example: page 21
comparison: vertical separation leads to higher mark- up => worse off
alternative solution: vertical restraints
two- part tariff (p.24)
Horizontal externality
free- riding problem
a model with retailer service (p.31)
effort in providing service
vertical separation
vertical integration
outcome => higher demand curve => higher quantity (even if higher price)
Alternatives to vertical integration (to make p > w)
exclusive territories (ET) (p.39): each of retailers serves half of final customers
resale price maintenance (RPM)
p.40 (no f)
retailer's choice
effects of ET (p.41 - 42)
w < c => will use two- part tariff
below- cost pricing (w < c)
today, it is legal to set a manufacturer suggested retail price (MSRP)
competition between manufacturers (inter- brand competition) (p.49)
Public policy