Vertical Structure Restraints &
Behavior
Economics 147
John F. Stewart
Quick introduction to vertical structure and
behavior
the broiler industry
Vertical Restraint &
Vertical Behavior
Two explanations
Market power
Efficiency
Economics of vertical relationships
double marginalization
insufficient promotion
input substitution
University of North Carolina
Chapel Hill
Public Policy toward vertical restraints
Vertical Structure
of Broiler Industry
Horizontal Structure of
Broiler Industry
Final Markets
Econ 147 (22_s)Vertical Restraint.PRZ1-4
Econ 147, John F. Stewart
11/22/02
List of Vertical Restraints
List of Vertical Restraints
Territorial
Customer Restrictions
sell only to certain types of customers
Territorial confinement
e.g. sell only wholesale
exclusive territories
Exclusive dealership
Primary responsibility
Location clause
Profit-Passover
not to sell to certain types of customers
not to sell to discounters
not to sell to customers reserved by
manufacturer
Economic Analysis of Vertical
Behavior
List of Vertical Restraints
Others
Resale price maintenance (RPM)
Full line forcing
Requirements contracts
Tie in sales
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
Double Marginalization
Double Marginalization
Monopoly wholesaler and competitive retailer
assume MCretail = Pwholesale
$
Monopoly wholesaler and monopoly retailer
assume MCretail = Pwholesale
with no vertical restraint
$
PR
PW=PR=MC R
PW
ProfitW
Wholesaler
Cost
Demand
D R=DW
MRW
Q
Wholesaler
Cost
Retail
Demand
Q
Q
Double Marginalization
PR
RPM could achieve the same result
PW
MRretail
Dwholesale
Q
Insufficient Promotion
Monopoly wholesaler and monopoly retailer
assume MCretail = Pwholesale
with no vertical restraint
If manufacture vertically integrated would set
MCWholesale = MRRetail
$
MRwholesale
Monopoly wholesaler and competitive retailer
demand depends on at site service
$
PR =PW
ProfitW
Wholesaler
Cost
Retail
Demand
Q
Q*
MRwholesale
MR
Dwholesale
retail
Econ 147 (22_s)Vertical Restraint.PRZ9-12
Wholesaler
Cost
D(P,S0 )
Q
Q
MRW
Econ 147, John F. Stewart
11/22/02
Insufficient Promotion
Public Policy & Vertical Restraint
Monopoly wholesaler and competitive retailer
demand depends on at site service
Restrictive Practice
Potential
anticompetitive
effect
Main
statute
Judicial rule
Tying
Exclusionary
Clayton 3 &
Sherman 2
Mixed rule of
reason and per se
Exclusive Dealing
Exclusionary
Clayton 3
Rule of reason
Territorial restrictions
Collusive
Sherman 1
Rule of Reason
RPM
Collusive
Sherman 1
per se though of
diminishing
importance
$
+CS
P*
PW
MCR +S*
-cost
+Π
ProfitW
MR*
D(P,S*)
Wholesaler
Cost
W
D(P,S0 )
Q
MRW
Jefferson Parish Hospital v. Hyde
The Same Old Debate
1984, Tying and exclusive dealing
Case
Chicago & the conservatives
Use of exclusive contract for anesthesiologists
Hyde: exclusion from market, limit on patient
choice
Hospital: no monopoly power
vertical behavior cannot increase market
power, but can mitigate it
free rider problems are important
inter-brand competition is strong
Key legal and economic issues
The liberals
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?
past evidence shows use of vertical behavior
to discipline price cutters
some vertical objects same as horizontal
conspiracy
Econ 147 (22_s)Vertical Restraint.PRZ13-16
Econ 147, John F. Stewart
11/22/02
Kodak
Monsanto
1992, Tying service to product
1984, Resale Price Maintenance
Case:
Case:
dealer terminated, argues RPM and boycott
Monsanto argues didn't do it
After loosing a large service contract to an
ISO, Kodak refused to sell parts to ISO's.
Group of ISO's sued.
Trial
Trial
done on a per se basis (though had a better
rule of reason case)
guilty upheld on appeal
summary judgment, appeal on market power
trial, guilty up held on appeal (monopolization
of service based on parts monopoly & policy)
Issues:
Issues:
efficiency arguments and RPM
legal legacy: high burden to show conspiracy
inter v. intrabrand competition
Econ 147 (22_s)Vertical Restraint.PRZ17-20
Econ 147, John F. Stewart
11/22/02