Price-Dependent Profit-Sharing as a Channel Coordination Device

39 Pages Posted: 20 Feb 2010

See all articles by Øystein Foros

Øystein Foros

Norwegian School of Economics (NHH) - Department of Business and Management Science

Kare P. Hagen

Norwegian School of Economics (NHH) - Department of Economics

Hans Jarle Kind

Norwegian School of Economics & Business Administration (NHH); CESifo (Center for Economic Studies and Ifo Institute); Norwegian School of Economics (NHH) - Department of Economics

Date Written: August 13, 2009

Abstract

We show how an upstream firm by using a price-dependent profit-sharing rule can prevent destructive competition between downstream firms that produce relatively close substitutes. With this rule the upstream firm induces the retailers to behave as if demand has become less price elastic. As a result, competing downstream firms will maximize aggregate total channel profit. When downstream firms are better informed about demand conditions than the upstream firm, the same outcome cannot be achieved by vertical restraints such as resale price maintenance (RPM). Price-dependent profit-sharing may also ensure that the downstream firms undertake efficient market expanding investments. The model is consistent with observations from the market for content commodities distributed by mobile networks.

Keywords: Profit-sharing, vertical restraints, investments, competition.

JEL Classification: L13, L42, L86, M21

Suggested Citation

Foros, Øystein and Hagen, Kare Petter and Kind, Hans Jarle, Price-Dependent Profit-Sharing as a Channel Coordination Device (August 13, 2009). NHH Dept. of Economics Discussion Paper No. 9/2009, Available at SSRN: https://ssrn.com/abstract=1554813 or http://dx.doi.org/10.2139/ssrn.1554813

Øystein Foros

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Kare Petter Hagen

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Hans Jarle Kind (Contact Author)

Norwegian School of Economics & Business Administration (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 583 890 (Phone)
+47 55 583 901 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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