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Reverse Pricing and Revenue Sharing in a Vertical Market

25 Pages Posted: 6 May 2013  

Qihong Liu

University of Oklahoma - Department of Economics

Jie Shuai

Zhongnan University of Economics and Law

Date Written: May 6, 2013

Abstract

Advancing in information technology has empowered firms with unprecedented flexibility when interacting with each other. We compare welfare results in a vertical market (e.g., manufacturers and retailers) across several types of pricing strategies depending upon (1) which side (retailers or manufacturers) chooses retail prices and (2) whether there is revenue sharing or linear pricing between the two sides. Our results are as follows. Under revenue sharing, retail prices (and thus industry profits) are higher if and only if they are chosen by the side featuring less competition. Under linear pricing, however, retail prices are higher if they are chosen by the side featuring more competition (for linear demand functions). Relative to linear pricing, revenue sharing always leads to lower retail prices, higher consumer surplus and social surplus. However, the comparison on industry profits depends on the demand elasticity ratios. Revenue sharing raises industry profits when the elasticity ratios are small, but the results are reversed when the elasticity ratios are large.

Keywords: Reverse pricing, Revenue sharing, Vertical relationship

JEL Classification: D43, L13

Suggested Citation

Liu, Qihong and Shuai, Jie, Reverse Pricing and Revenue Sharing in a Vertical Market (May 6, 2013). Available at SSRN: https://ssrn.com/abstract=2261207 or http://dx.doi.org/10.2139/ssrn.2261207

Qihong Liu (Contact Author)

University of Oklahoma - Department of Economics ( email )

Norman, OK 73019-2103
United States
405-325-5846 (Phone)

HOME PAGE: http://qliu.oucreate.com

Jie Shuai

Zhongnan University of Economics and Law ( email )

182 Nanhu Ave.
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

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