The Economics of Vertical Restraints in Digital Markets

Abstract

Vertical restraints are contractual arrangements between firms at different levels in a supply chain (e.g., manufacturer and retailer, manufacturer and distributor, distributor and retailer) that are more complex than simple per-unit pricing arrangements. The purpose of this chapter is to provide an overview of the economics of vertical restraints and thereby provide an economic foundation for the antitrust analysis of vertical restraints.

The literature on vertical restraints is large. This chapter touches on many of the relevant concepts at a high level, references past work for certain ideas, and focuses in depth on four main issues: (i) the general nature of double marginalization and the benefits of vertical restraints that eliminate it in both single- and multi-product settings; (ii) the welfare effects of vertical restraints that address service externalities; (iii) the implications of bilateral contracting and bargaining for the effects of vertical restraints; and (iv) the effects of anti-steering provisions, a vertical restraint that does not appear explicitly in most textbooks but has been prominent in antitrust cases in the digital age.