Vertical Collusion to Exclude Product Improvement

David Gilo and Yaron Yehezkel

Journal of Industrial Economics, 2024, vol. 72, issue 3, 1227-1268

Abstract: A manufacturer of an established product repeatedly interacts with a retailer that can sell an inferior new product thereby improving it. The manufacturer's exclusionary strategy consists of a permanently below‐cost wholesale price and “vertical collusion” with the retailer to exclude via a future reward of a reduced fixed fee. The latter tool is available only in an infinite game. Although contracts include fixed fees, the retailer sells the new product more than what maximizes industry profits. Exclusive dealing or a vertical merger between the manufacturer of the established product and the retailer replicate the vertically integrated outcome and increase prices.

Date: 2024
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