Download This PaperVertical Collusion to Exclude Product Improvement
48 Pages Posted: 20 Apr 2020 Last revised: 13 May 2023
Date Written: March 16, 2020
Abstract
A manufacturer of an established product repeatedly interacts with a retailer that can sell an inferior new product thereby improving it. The manufacturer's exclusionary strategy consists of a permanently below-cost wholesale price and “vertical collusion” with the retailer to exclude via a future reward of a reduced fixed fee. The latter tool is available only in an infinite game. Although contracts include fixed fees, the retailer sells the new product more than what maximizes industry profits. Exclusive dealing or a vertical merger between the manufacturer of the established product and the retailer replicate the vertically integrated outcome and increase prices.
Keywords: dynamic vertical relations, vertical collusion, predatory pricing, exclusive dealing, vertical mergers
JEL Classification: L41, L42, K21, D8
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