Vertical Integration and Pricing Incentives: Evidence From the Tablet Computer Market

65 Pages Posted: 5 Jun 2023

See all articles by R. Scott Hiller

R. Scott Hiller

Fairfield University - Department of Economics

Scott Savage

University of Colorado at Boulder

Date Written: June 1, 2023

Abstract

This paper examines pricing incentives for vertically-integrated manufacturers that retail. We estimate a model of demand and supply in the upstream and downstream markets for tablet computers in the United States and solve the model for the firms’ optimal price conditions. The price conditions are used to recover retail price-cost margins, wholesale price-cost margins and total marginal costs for 176 products supplied by ten manufacturers during the third quarter of 2019. Our results indicate positive incentives for Apple and Microsoft to increase their wholesale margins to raise rival retailers’ costs. The average increase of $23.80 per model is non-trivial for the dominant firm, Apple, and is equivalent to about $57.85 million per quarter. Some of the benefits from using a direct distribution channel such as The Apple Store or The Microsoft Store to raise rivals’ costs may be offset by an increase in the marginal cost of retailing. The increase in this marginal cost is large for Microsoft and may shed some light on why they began closing their physical stores in the late 2010s.

Keywords: dual-channel distribution, price-cost margins, tablet computers, vertical relations

JEL Classification: D4, F13, L63

Suggested Citation

Hiller, R. Scott and Savage, Scott, Vertical Integration and Pricing Incentives: Evidence From the Tablet Computer Market (June 1, 2023). Available at SSRN: https://ssrn.com/abstract=4466133 or http://dx.doi.org/10.2139/ssrn.4466133

R. Scott Hiller (Contact Author)

Fairfield University - Department of Economics ( email )

Fairfield, CT 06824
United States

Scott Savage

University of Colorado at Boulder

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