Jump to ContentJump to Main Navigation
Show Summary Details
In This Section

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year


IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2015: 0.501
Source Normalized Impact per Paper (SNIP) 2015: 0.418

Online
ISSN
1935-1682
See all formats and pricing
In This Section
Volume 13, Issue 2 (Oct 2013)

Issues

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Vertical Contracts and Mandatory Universal Distribution

Larry S. Karp
  • Corresponding author
  • Department of Agricultural and Resource Economics, University of California, 207 Giannini Hall, Berkeley, CA 94720, USA
  • Email:
/ Jeffrey M. Perloff
  • Department of Agricultural and Resource Economics, University of California, 207 Giannini Hall, Berkeley, CA 94720, USA
  • Email:
Published Online: 2013-10-09 | DOI: https://doi.org/10.1515/bejeap-2012-0073

Abstract

An upstream monopoly that provides a new good to a downstream oligopoly might prefer to sell to a single rather than to multiple downstream firms. For example, Apple initially sold its iPhone through one vendor. If a monopoly uses a single vendor, the government may impose a mandatory universal distribution (MUD) requirement that forces the monopoly to sell to all downstream vendors. However, if the income elasticity of demand for the new good is greater than the income elasticity of the existing generic good, the MUD requirement leads to a higher equilibrium price for both the new good and the generic and lowers consumer welfare.

Keywords: vertical restrictions; mandatory universal distribution; new product; oligopoly

JEL Classification Numbers: L12; L13; L42

References

  • Abito, J. M., and J. Wright. 2008. “Exclusive Dealing with Imperfect Downstream Competition.” International Journal of Industrial Organization 26:227–46. [Crossref] [Web of Science]

  • Agion, P., and P. Bolton. 1987. “Contracts as a Barrier to Entry.” American Economic Review 77:388–401.

  • Argenton, C. 2010. “Exclusive Quality.” The Journal of Industrial Economics 58:690–716. [Web of Science] [Crossref]

  • Bonanno, G. 1986. “Vertical Differentiation with Cournot Competition.” Economic Notes 15(20):68–81.

  • Bork, R. 1978. The Antitrust Paradox. New York: Free Press.

  • Bustos, A., and A. Galetovic 2008. “Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly,” Working paper.

  • Consumer Reports. 2009. “Want That Phone?” Consumer Reports (10):6.

  • De-Graba, P. 1990. “Input Market Price Discrimination and the Choice of Technology.” American Economic Review 80:1246–53.

  • Doganoglu, T., and J.Wright. 2010. “Exclusive Dealing with Network Effects.” International Journal of Industrial Organization 28:145–54. [Crossref] [Web of Science]

  • Economides, N. 1998. “The Incentive for Non-Price Discrimination by an Input Monopolist.” International Journal of Industrial Organization 16:271–84. [Crossref]

  • Fumagalli, C., and M. Motta. 2006. “Exclusive Dealing and Entry, When Buyers Compete.” American Economic Review 96(3):785–95. [Crossref] [Web of Science]

  • Gabszewicz, J. J., and J.-F. Thisse. 1979. “Price Competition, Quality and Income Disparities.” Journal Economic Theory 20:340–59. [Crossref]

  • Hart, O., and J. Tirole 1990. “Vertical Integration and Market Foreclosure,” Brookings Papers on Economic Activities: Microeconomics, 205–76. [Web of Science]

  • Inderest, R., and G. Shaffer. 2010. “Market-Share Contracts as Facilitating Practices.” The Rand Journal of Economics 41:709–29. [Web of Science] [Crossref]

  • Innes, R., and S. Hamilton. 2006. “Naked Slotting Fees for Vertical Control of Multi-Product Retail Markets.” International Journal of Industrial Organization 24:303–18. [Crossref]

  • Innes, R., and S. Hamilton. 2009. “Vertical Restraints and Horizontal Control.” Rand Journal of Economics 40:120–43. [Web of Science] [Crossref]

  • Ireland, N. 1992. “On the Welfare Effects of Regulating Price Discrimination.” Journal of Industrial Economics 40:237–48. [Crossref]

  • Katz, M. 1987. “The Welfare Effects of Third-Degree Price Discrimination in Intermediate Goods Markets.” American Economic Review 77:154–67.

  • Kitamura, H. 2010. “Exclusionary Vertical Contracts with Multiple Entrants.” International Journal of Industrial Organization 28:213–19. [Web of Science] [Crossref]

  • Kitamura, H. 2011. “Exclusive Contracts Under Financial Constraints.” The B.E. Journal Economic Analysis and Policy 11:1–29.

  • Moner-Colonques, R., J. Sempere-Monerris, and A. Urbano. 2004. “The Manufacturers’ Choice of Distribution Policy under Successive Duopoly.” Southern Economic Journal 70:532–48. [Crossref]

  • Ordover, J., S. Salop, and G. Saloner. 1990. “Equilibrium Vertical Foreclosure.” American Economic Review 80:127–42.

  • Riordan, M. 1998. “Anticompetitive Vertical Integration by a Dominant Firm.” American Economic Review 88:1232–48.

  • Salop, S., and D. Scheffman. 1983. “Raising Rivals’ Costs.” American Economic Review 73:267–71.

  • Schmalensee, R. 1981. “Output and Welfare Effects of Monopolistic Third-Degree Price Discrimination?” American Economic Review 71:242–7.

  • Shaffer, R. 2005. “Slotting Allowances and Optimal Product Variety.” Advances in Economic Analysis and Policy 5:Article 3. [Crossref]

  • Shaked, A., and J. Sutton. 1982. “Relaxing Price Competition through Product Differentiation.” Review Economic Studies 49:3–13. [Crossref]

  • Simpson, J., and A. L. Wickelgren. 2007. “Naked Exclusion, Efficient Breach, and Downstream Competition.” American Economic Review 97(4):1305–20. [Crossref]

  • Singh, N., and X. Vives. 1984. “Price and Quantity Competition in a Differentiated Duopoly.” RAND Journal of Economics 15(4):546–54. [Crossref]

  • Varian, H. 1985. “Price Discrimination and Social Welfare.” American Economic Review 75:870–5.

  • Villas-Boas, S. 2009. “An Empirical Investigation of the Welfare Effects of Banning Wholesale Price Discrimination.” Rand Journal of Economics 40(1):20–45. [Crossref]

  • Weisman, D. 2001. “Access Pricing and Exclusionary Behavior.” Economics Letters 72:121–6. [Crossref]

  • White, L. 2007. “Foreclosure with Incomplete Information.” Journal of Economics and Management Strategy 16:507–35. [Crossref]

  • Wright, J. 2008. “Naked Exclusion and the Anticompetitive Accommodation of Entry.” Economics Letters 98:107–12. [Web of Science] [Crossref]

  • Yoshida, Y. 2000. “Third-Degree Price Discrimination in Input Markets: Output and Welfare.” American Economic Review 90:240–6. [Crossref]

About the article

Received: 2012-12-10

Accepted: 2013-08-20

Published Online: 2013-10-09


“Supporting Memorandum of Points and Authorities,” In Re Apple & AT&TM Anti-trust Litigation, U.S. District Court, Northern District of California, San Jose Division, Case no. C 07–5152 JW, 12 September 2008. In 2011, Apple signed contracts allowing AT&T’s competitors Verizon and Sprint to start selling iPhones.

We do not claim that the equilibrium is unique, merely that the beliefs described in the text are consistent with equilibrium, and that the equilibrium action given those beliefs (and our tie-breaking assumption) is unique. A discussion of uniqueness of equilibrium beliefs would require a description of the consequences of neither firm making a bid and would take us far afield.

The quadratic utility function produces linear demand functions. However, symmetry of the cross partials of the Hicksian demand functions requires (Singh and Vives 1984).

Gabszewicz and Thisse (1979), Shaked and Sutton (1982), and Bonanno (1986) used a model of consumer behavior that generates a system of linear demand functions similar to this model, though with a slightly different interpretation of the demand system parameters. Products have a physical characteristic (location) that measures quality. Consumers have identical preferences but different incomes and buy at most one unit of a product.

Moner-Colonques, Sempere-Monerris, and Urbano (2004) examine a market in which two upstream firms decide whether to sell their products through one or both of the downstream vendors. Their model allows the upstream firms to charge only a per-unit price, whereas our upstream firm also uses a transfer. In addition, we allow the cross-price coefficients c and C to differ. The difference in these coefficients is key to our results.

Given our earlier assumptions, we have three free parameters, and F, but only c and C have a direct effect on the equilibrium quantities for a given number of downstream vendors. We set and in all our simulations. Given inequalities [10], these parameter choices imply that c and C must each be less than . For specificity, we set and and examine how the results vary with C.

This claim can be verified immediately using the equation for the difference in generic prices, eq. [20] in the Appendix. Similarly, the claim regarding the difference in new-product price can be verified by using eq. [21].

We use the same parameters as above to produce this figure. This figure uses the change in consumer surplus only to illustrate the change in consumer welfare. Neither our heuristic argument in the text nor the formal statement and proof in “Consumer welfare” in Appendix use consumer surplus to determine the change in consumer welfare.

The working paper on which this article is based shows that most of our qualitative results, with the exception of Proposition 8, continue to hold if we alter the original game by constraining m so that equilibrium duopoly profits do not fall below .


Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2012-0073. Export Citation

Comments (0)

Please log in or register to comment.
Log in