Retail Competition Percolating Through to Suppliers and the Use of Vertical Integration, Tying and Vertical Restraints to Stop it

51 Pages Posted: 25 Apr 2002 Last revised: 7 Apr 2008

See all articles by David Gilo

David Gilo

Tel Aviv University - Buchmann Faculty of Law

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Abstract

Conventional wisdom presumes that a supplier in a monopolistic market, or in an oligopolistic market that is not perfectly competitive, has the power to charge a supra-competitive wholesale price. In contrast, elaborating on recent economics studies, this Article shows that the supplier of an intermediate product may not be able to charge a supra-competitive wholesale price. This is because the supplier has the incentive to grant a marginal price concession to one buyer, in exchange for a fixed payment, at the expense of competing buyers. This Article demonstrates how vertical integration, tying and vertical restraints (particularly imposition of minimum or maximum resale prices, selling to a sole buyer, designation of exclusive territories to buyers, and using most-favored-consumer clauses) can be used to remove the supplier's incentive to grant such concessions, and thus restore the supplier's market power. This reveals an anticompetitive explanation for vertical integration and vertical restraints that has been neglected by legal commentators, courts, and agencies. The Article also reveals an anticompetitive explanation for tying that has not been identified by either the economics or the legal literature, or by the case law. Moreover, filling the void left by the current economics literature on the subject, the Article shows how imposition of maximum resale prices is anticompetitive even when it does not completely eliminate buyers' profits from sales. The Article further shows how the supplier's incentive to grant concessions renders the double marginalization and input substitution efficiencies of vertical integration less important than conventionally thought. In addition, more antitrust concerns are raised when the supplier is contractually bound to enforce minimum resale prices or exclusive dealerships. As the Article reveals, however, in contrast to recent economics literature, even if these restraints do not bind the supplier to enforce them, they are anticompetitive, as they aid the supplier in developing a reputation for not making concessions. Finally, the statutory ban on second degree price discrimination helps the supplier commit to charging a supra-competitive wholesale price. However, the Article exposes how buyer liability under this statutory ban erodes the effectiveness of the statute and fuels the supplier's urge to make concessions.

Keywords: vertical restraints, vertical integration, tying, supplier market power, commitment problem, bilateral contracts

JEL Classification: K21, L12, L13, L14, L42

Suggested Citation

Gilo, David, Retail Competition Percolating Through to Suppliers and the Use of Vertical Integration, Tying and Vertical Restraints to Stop it. Yale Journal on Regulation, Vol. 20, pp. 25-75, 2003. Available at SSRN: https://ssrn.com/abstract=308641

David Gilo (Contact Author)

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel
+972-3-6406299 (Phone)

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