Vertical Restraint & Vertical Behavior

Transcription

1 Economics 147 John F. Stewart Vertical Restraint & Vertical Behavior University of North Carolina Chapel Hill Vertical Structure Restraints & Behavior uick introduction to vertical structure and behavior the broiler industry Two explanations Market power Efficiency Economics of vertical relationships double marginalization insufficient promotion input substitution Public Policy toward vertical restraints Vertical Structure of Broiler Industry Final Markets Horizontal Structure of Broiler Industry Econ 147 (22_s)Vertical Restraint.PRZ1-4 Econ 147, John F. Stewart 11/22/02

2 List of Vertical Restraints Territorial Territorial confinement exclusive territories Exclusive dealership Primary responsibility Location clause Profit-Passover List of Vertical Restraints Customer Restrictions sell only to certain types of customers e.g. sell only wholesale not to sell to certain types of customers not to sell to discounters not to sell to customers reserved by manufacturer List of Vertical Restraints Others Resale price maintenance (RPM) Full line forcing Requirements contracts Tie in sales Economic Analysis of Vertical Behavior Efficiency explanations double marginalization sales effort and "value added" activity (the "free rider" problem) variety of "technical" economies (scheduling, etc.) Market power explanations oligopolistic coordination at dealer level oligopolistic coordination at the manufacturers' level Econ 147 (22_s)Vertical Restraint.PRZ5-8 Econ 147, John F. Stewart 11/22/02

3 Double Marginalization Double Marginalization assume MCretail = Pwholesale Monopoly wholesaler and monopoly retailer assume MC retail = P wholesale with no vertical restraint PR =PR=MC R DR=DW Retail MRwholesale MRretail Dwholesale Double Marginalization Insufficient Promotion Monopoly wholesaler and monopoly retailer assume MC retail = P wholesale with no vertical restraint If manufacture vertically integrated would set demand depends on at site service PR MCWholesale = MRRetail RPM could achieve the same result PR= Retail D(P,S0) * MRwholesale MRretail Dwholesale Econ 147 (22_s)Vertical Restraint.PRZ9-12 Econ 147, John F. Stewart 11/22/02

4 Insufficient Promotion Public Policy & Vertical Restraint P* -cost +CS demand depends on at site service MCR+S* Restrictive Practice Potential anticompetitive effect Main statute Tying Exclusionary Clayton 3 & Sherman 2 Judicial rule Mixed rule of reason and per se Exclusive Dealing Exclusionary Clayton 3 Rule of reason +Π MR* W D(P,S*) D(P,S0) Territorial restrictions Collusive Sherman 1 Rule of Reason RPM Collusive Sherman 1 per se though of diminishing importance The Same Old Debate Chicago & the conservatives vertical behavior cannot increase market power, but can mitigate it free rider problems are important inter-brand competition is strong The liberals past evidence shows use of vertical behavior to discipline price cutters some vertical objects same as horizontal conspiracy Jefferson Parish Hospital v. Hyde 1984, Tying and exclusive dealing Case Use of exclusive contract for anesthesiologists Hyde: exclusion from market, limit on patient choice Hospital: no monopoly power Key legal and economic issues definition of market per se nature of tying economic benefit to firm when have no financial interest in tied good how does it increase profits? Econ 147 (22_s)Vertical Restraint.PRZ13-16 Econ 147, John F. Stewart 11/22/02

5 Kodak 1992, Tying service to product Case: After loosing a large service contract to an ISO, Kodak refused to sell parts to ISO's. Group of ISO's sued. Trial summary judgment, appeal on market power trial, guilty up held on appeal (monopolization of service based on parts monopoly & policy) Issues: inter v. intrabrand competition Monsanto 1984, Resale Price Maintenance Case: dealer terminated, argues RPM and boycott Monsanto argues didn't do it Trial done on a per se basis (though had a better rule of reason case) guilty upheld on appeal Issues: efficiency arguments and RPM legal legacy: high burden to show conspiracy Econ 147 (22_s)Vertical Restraint.PRZ17-20 Econ 147, John F. Stewart 11/22/02