Exclusive dealing and vertical integration in interlocking relationships

We develop a model of interlocking bilateral relationships between upstream firms (manufacturers)that produce differentiated goods and downstream firms (retailers) that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, to the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically

Equilibrium Selection in Sequential Games with Imperfect Information

Games with imperfect information often feature multiple equilibria, which depend on beliefs off the equilibrium path. Standard selection criteria such as passive, symmetric or wary beliefs rest on ad hoc restrictions on beliefs. We propose a new selection criterion that imposes no restrictions on beliefs: we select the action pro\u85le that is supported in equilibrium by the largest set of beliefs. We conduct an experiment to compare the predictive power of the existing and our novel selection criteria in an application on vertical multi- lateral contracting. We find that our criterion outperforms the other selection criteria

Secret contracting in multilateral relations

We develop a general, tractable framework of multilateral vertical contracting, which places no restriction on tariffs and fully accounts for their impact on downstream competition. Equilibrium tariffs are cost-based and replicate the outcome of a multi-brand oligopoly, a finding in line with the analysis of a recent merger. We provide a micro-foundation for this framework, before analyzing the effect of RPM and price parity provisions, and of resale vs. agency business models. Finally, we extend the framework to endogenize the distribution network; we also consider mergers and show that their impact on the distribution network can dominate price effects

Exclusive dealing and vertical integration in interlocking relationships

We develop a model of interlocking bilateral relationships between upstream manufacturers that produce differentiated goods and downstream retailers that compete imperfectly for consumers. Contract offers and acceptance decisions are private information to the contracting parties. We show that both exclusive dealing and vertical integration between a manufacturer and a retailer lead to vertical foreclosure, at the detriment of consumers and society. Finally, we show that firms have indeed an incentive to sign such contracts or to integrate vertically

Bargaining competition and vertical mergers

EconomicsThesis (PhD)--Stellenbosch University, 2022.ENGLISH SUMMARY: Vertically related markets and vertical mergers are complex systems that comprise a number of distinct features. The modelling of such complex systems involves several modelling choices that affect the predicted model outcomes. We rely on simulation-based methods to consider how choices of key model parameters, assumptions and industry structures map onto competitive outcomes in vertically related markets and for vertical mergers. Our simulation results can help guide practitioners in selecting models that best characterise the features of a given vertical relationship, especially since assumptions that distinguish the models from one another — how and over what parties bargain — are typically not observed. In particular, this dissertation studies vertically related markets and vertical mergers along three dimensions. Firstly, we focus on comparing alternative models of vertical competition, based on different assumptions regarding the nature and object of vertical contracting. As far as the nature of vertical contracting is concerned, models may assume upstream and downstream firms reaching agreement through take-it-or-leave-it offers, bargaining or recursive bargaining. As far as the object of vertical contracting is concerned, models may assume vertical contracting is over linear prices (a marginal wholesale price) or two-part prices (a marginal wholesale price and a fixed f ee). We systematically compare the corpus of models of vertically related markets across two simple industry structures (‘1 _ 2’, one upstream and two downstream firms; and ‘2_1’, two upstream and one downstream firm) to allow direct comparisons. Our comparisons show that in a linear pricing setting, a modelling choice between bargaining and recursive bargaining is irrelevant to the outcome. In two-part pricing, however, bargaining leads to a more competitive outcome than the joint profit maximising outcome under recursive bargaining. Secondly, we study and compare models for vertical merger analysis, in order to investigate how assumptions regarding vertical contracting map onto observable merger effects. We also examine the extent to which predictions from models of vertical mergers are robust to different specifications of substitutability. In particular, we compare models calibrated to an increasing aggregate elasticity (i.e. the substitutability of the inside goods with the outside good) with models calibrated to the nest strength parameter of the demand function. Our results show that the predicted merger effects from different models are consistent for the two measures of substitutability. The results also illustrate that modelling choices such as the specification of the industry structure or object and nature of vertical contracting that determined outcomes in the pre-merger world, can also predetermine post-merger outcomes. Lastly, we introduce a vertical merger simulator tool to allow an assessment of vertical merger scenarios in practice. We illustrate the utility of the simulator as a screening tool by reference to a number of examples reflecting modelling choices often faced by practitioners. In this regard, we illustrate three examples where the exogenous variables of interest are the marginal cost of the upstream firm and downstream firms, the market shares and the prices of the downstream firms respectively. We compare the simulator to incentive scoring methods (comprising of various upward pricing pressure indices), which have received extensive attention in literature and policy circles as a screening tool for merger effects, including for vertical mergers. While direct comparisons are challenging, it is evident that the data requirements of our vertical merger simulator are not particularly onerous compared to those of incentive scoring indices. The simulator offers the additional benefit of full equilibrium analysis, compared to the partial equilibrium focus of incentive scoring methods. We conclude that the simulator can be a useful complementary tool for vertical merger screening.AFRIKAANSE OPSOMMING: Vertikaalverwante markte en vertikale samesmeltings behels komplekse sisteme wat uit verskeie unieke eienskappe bestaan. Die modellering van hierdie komplekse sisteme vereis verskeie modelleringskeuses wat die voorspelde uitkomste van hierdie modelle kan beïnvloed. Gevolglik steun ons op simulasie-gebaseerde metodes om te ondersoek hoe keuses rakende belangrike parameters, aannames en industrie strukture neerslag vind in mededingende uitkomste in vertikaalverwante markte, ook na aanleiding van vertikale samesmeltings. Ons simulasie resultate kan praktisyns lei om daardie modelle te kies wat die eienskappe van ‘n gegewe vertikale verhouding ten beste belig. Dit is veral behulpsaam gegewe dat aannames wat verskillende modelle onderskei — aannames omtrent hoe en waaroor partye onderhandel — tipies nie waargeneem kan word nie. Hierdie proefskrif ondersoek vertikaalverwante markte en vertikale samesmeltings vanuit drie oogpunte. Eerstens, fokus ons op die modellering van uitkomste in vertikaalverwante markte. Die literatuur stel ‘n verskeidenheid modelle van vertikale mededinging voor, gegrond op verskillende aannames rakende die tipe en objek van vertikale kontraktering. Met betrekking tot die tipe vertikale kontraktering, kan modelle voorsiening maak vir geen onderhandeling, onderhandeling of rekursiewe onderhandeling tussen firmas wat in ‘n vertikale verhouding verkeer. Met betrekking tot die objek van vertikale kontraktering, kan modelle voorsiening maak vir lineêre pryse (‘n marginale groothandelprys) of tweestukpryse (‘n marginale groothandelprys en ‘n vaste fooi). Ons vergelyk die corpus van modelle vir twee eenvoudige industriestrukture (‘1 _ 2’, een opstroom en twee afstroom firmas; en ‘2 _ 1’, twee opstroom en een afstroom firmas) wat direkte vergelykings moontlik m aak. Ons vergelykings toon dat, sover dit lineêre pryse aangaan, ‘n keuse tussen onderhandeling en rekursiewe onderhandeling irrelevant tot modeluitkomste is. Daarenteen lei onderhandeling tot ‘n meer mededingende uitkoms as die gesamentlike winsmaksimerende uitkoms van rekursiewe onderhandeling, waar dit tweestukpryse aangaan. Tweedens, vergelyk ons modelle van vertikale samesmeltings om te ondersoek hoe aannames rakende vertikale kontraktering in waarneembare samesmeltingeffekte figureer. Ons ondersoek ook hoe verskillende substitusiespesifikasies die vooruitskattings van modelle van vertikale samesmeltings beïnvloed. Ons vergelyk, in die besonder, modeluitkomste met ‘n fokus op sg. totale elastisiteit (d.w.s. die substitusie van alle produkte binne die mark met ‘n nominale buite-produk) en dié met ‘n fokus op diesg. nesparameter van die vraagfunksie. Ons bevind dat die voorspelde samesmeltingseffekte van die verskillende modelle konsekwent vir die twee alternatiewe maatstawwe van substitusie is. Die resultate dui ook aan dat modelleringskeuses vir die wêreld voor ‘n samesmelting (insluitend keuses omtrent die spesifikasie van die industriestruktuur sowel as die objek en tipe van vertikale kontraktering) dikwels die voorspelde uitkomste van die samesmelting voorafbepaal. Laastens, stel ons ‘n vertikale-samesmelting simulator bekend wat die beoordeling van alternatiewe vertikale-samesmelting scenarios in die praktyk kan ondersteun. Ons illustreer die bruikbaarheid van die simulator as ‘n keuringsinstrument deur te verwys na voorbeelde wat die gereelde modelleringskeuses van praktisyns reflekteer. In hierdie opsig, verwys ons na drie voorbeelde waar die eksogene veranderlikes van belang onderskeidelik die marginale koste van opstroom en afstroom firmas, die markaandele en die prys van die afstroom firmas is. Ons vergelyk die simulator met metodes vir insentieftellings (en bepaald verskeie sg. opwaartseprysdrukindekse), wat breedvoerige aandag as keuringsinstrument (ook vir vertikale samesmeltings) in die literatuur en onder beleidsmakers geniet. Alhoewel ‘n direkte vergelyking uitdagend is, is dit duidelik dat die datavereistes van ons vertikale-samesmelting simulator nie noodwendig hoër as diè van opwaartseprysdrukindekse is nie. Die simulator bied die addisionele voordeel van ‘n ontleding vanuit die oogpunt van totale markewewig, terwyl die resultate van opwaartseprysdrukindekse op parsiële markewewig staatmaak. Die simulator bied dus ‘n nuttige komplementêre instrument vir die keuring van vertikale samesmeltings.Doctorat