Vertical Limit pricing

Aggey Semenov and Julian Wright

No 1104E, Working Papers from University of Ottawa, Department of Economics

Abstract: A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.

Keywords: limit pricing; vertical contracts; multi-part tariffs. (search for similar items in EconPapers)
JEL-codes: L12 L42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2011
New Economics Papers: this item is included in nep-bec, nep-com and nep-ind
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