Vertical Contracts and Vertical Ownership
21 Pages Posted: 9 Oct 2003
Date Written: August 14, 2003
It is well-known that a seller imposed non-discrimination clause can soften downstream price competition by constraining opportunistic pricing behavior on the part of an upstream monopolist seller. But what about about market settings in which there exists a pivotal buyer? We show that in the presence of pivotal buyers, a buyer imposed price floor may be an effective means of eliminating the dynamic inconsistency problem typically associated with the upstream seller. Moreover, a price floor may be a means to better align product selection from the perspective of the pivotal buyer on the part of the seller. We demonstrate how even a small amount of vertical ownership provides insurance for the pivotal buyer should the price floor prove ineffective, and that a partially integrated pivotal buyer can calibrate the price floor to maximize own profits in a fashion thatis also Pareto improving.
JEL Classification: L00, L14, L22, L42, L50, L82, D23, D81
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