Resale Price Maintenance and Horizontal Cartel

Whereas non-price restrictions such as exclusive territories are often tolerated while Resale Price Maintenance (RPM) is rather unanimously forbidden, the economic analysis shows so far that both types of restraints have positive and negative effects on welfare, in such a way that the balance is not clearly in favour of non-price restrictions. An often expressed idea to justify the courts' decisions against RPM is that it can limit both inter- and intra-brand competition. This paper analyses this argument in a context where manufacturers and retailers have interlocking relationships. It is shown that even as part of purely bilateral vertical contracts, RPM indeed limits the exercise of both inter- an intra-brand competition and can even generate industry-wide monopoly pricing. The final impact on prices depends on the substituability between retailers and between manufacturers, and on the extent of potential competition at the retail level.resale price maintenance, collusion, successive duopoly

The Role of Exclusive Territories in Producers' Competition

The central objective of this paper is to show how vertical restraints, which affect intra-brand competition, can and will be used as an effective mechanism for reducing inter-brand competition and increasing producer profits. We show how exclusive territories alter the perceived demand curve, making each producer believe he faces a less elastic demand curve, thereby inducing an increase of the equilibrium price. The use of exclusive territories may increase producers' profits, even if the producers cannot charge franchise fees, and so cannot recapture, from the retailers, the monopoly rents they earn from their exclusive territory: we show that 'double marginalization' effects can be overcome by the strategic effect on producers' competition. We provide a model in which we can clearly specify the full range of feasible contracts between producers and retailers, and show that it is always a dominant strategy for firms to use exclusive territories (so that exclusive territories are used in equilibrium) and that the best situation from the producers' viewpoint may or may not entail franchise fees. In all cases, exclusive territories hurt consumer surplus and reduce total welfare, which yields a different light on vertical restraints from a competition policy perspective.

Loss Leading as an Exploitative Practice

Large retailers, enjoying substantial market power in some local markets, often compete with smaller retailers who carry a narrower range of products in a more efficient way. We find that these large retailers can exercise their market power by adopting a loss-leading pricing strategy, which consists of pricing below cost some of the products also offered by smaller rivals, and raising the prices on the other products. In this way, the large retailers can better discriminate multi-stop shoppers from one-stop shoppers — and may even earn more profit than in the absence of the more efficient rivals. Loss leading thus appears as an exploitative device, designed to extract additional surplus from multi-stop shoppers, rather than as an exclusionary instrument to foreclose the market, although the small rivals are hurt as a by-product of exploitation. We show further that banning below-cost pricing increases consumer surplus, small rivals’ profits, and social welfare. Our insights apply generally to industries where a firm, enjoying substantial market power in one segment, competes with more efficient rivals in other segments, and procuring these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There as well, our analysis provides a rationale for below-cost pricing based on exploitation rather than exclusion.loss leading, exploitative practice, retail power

Bilateral Control with Vertical Contracts

A supplier is known to be subject to opportunism when contracting secretly with downstream competitors, particularly when downstream firms have "passive beliefs." We stress that in many situations, an equilibrium with passive beliefs may not exist and passive beliefs appear less plausible than "wary beliefs", introduced by McAfee and Schwartz, that account for multilateral deviations. We show that in a broad range of situations, equilibria with wary beliefs exist and reflect opportunism. Last, we confirm the insight, derived by O'Brien and Shaffer using a more ad-hoc equilibrium concept, that RPM eliminates the scope for opportunism.Opportunism, Secret Contracts, Beliefs, Resale Price Maintenance