Price and Non-Price Restraints When Retailers are Vertically Differentiated

36 Pages Posted: 9 Aug 2000

See all articles by Yossi Spiegel

Yossi Spiegel

Tel Aviv University, Coller School of Management; Centre for Economic Policy Research (CEPR); ZEW – Leibniz Centre for European Economic Research

Yaron Yehezkel

Coller School of Management , Tel-Aviv University

Date Written: June 2000

Abstract

We consider vertical restraints in the context of an intrabrand competition model in which a single manufacturer deals with two vertically differentiated retailers. We establish two main results. First, if the market cannot be vertically segmented and the cost difference between the two retailers is not too large, then the manufacturer will foreclose the low quality retailer either directly by making the high quality retailer an exclusive distributor, or indirectly by imposing a sufficiently high minimum resale price, or a sufficiently high franchise fee to ensure that the low quality retailer will be unable to earn a positive profit. Second, if the market can be vertically segmented, the manufacturer will impose customer restrictions and require the low quality retailer to serve consumers whose willingness to pay for quality is below some threshold and requiring the high quality retailer to serve consumers whose willingness to pay for quality is above that threshold. We show that this restriction benefits the manufacturer as well as consumers with low willingness to pay for quality, including some that are served by the high quality retailer, but it harms consumers with high willingness to pay.

Keywords: vertical restraints, exclusive distribution, vertical foreclosure, resale price maintenance, customer restrictions

JEL Classification: L42, K21

Suggested Citation

Spiegel, Yossi and Yehezkel, Yaron, Price and Non-Price Restraints When Retailers are Vertically Differentiated (June 2000). Available at SSRN: https://ssrn.com/abstract=236024 or http://dx.doi.org/10.2139/ssrn.236024

Yossi Spiegel (Contact Author)

Tel Aviv University, Coller School of Management ( email )

Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9063 (Phone)
972-3-640-7739 (Fax)

HOME PAGE: http://www.tau.ac.il/~spiegel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Yaron Yehezkel

Coller School of Management , Tel-Aviv University ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~yehezkel/

Register to save articles to
your library

Register

Paper statistics

Downloads
235
Abstract Views
1,410
rank
132,429
PlumX Metrics