Market-Share Contracts with Vertical Externalities

Amemiya Yuki, Kitamura Hiroshi () and Oshiro Jun
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Amemiya Yuki: Graduate School of Economics, Osaka University, 1-7 Machikaneyama, Toyonaka, Osaka 560-0043, Japan
Kitamura Hiroshi: Faculty of Economics, Kyoto Sangyo University, Motoyama, Kamigamo, Kita-Ku, Kyoto 603-8555, Japan
Oshiro Jun: Department of Law and Economics, Okinawa University, 555 Kokuba, Naha, Okinawa 902-0075, Japan

Asian Journal of Law and Economics, 2014, vol. 5, issue 1-2, 1-15

Abstract: We construct a model of market-share contracts with vertical externalities. When a dominant supplier offers a linear wholesale price to a retailer, vertical externalities, well-recognized as double-marginalization problems, arise in the vertical relation. The dominant supplier facing vertical externalities charges a wholesale price that is excessively high for both the vertical relation and social welfare. Under market-share contracts, the retailer can commit to increase the sales of goods produced by the dominant supplier for a lower wholesale price. We point out that this induces the vertical relation to engage in market-share contracts even in the absence of exclusionary effects in the upstream market. We also show that such contracts mitigate vertical externalities and improve social welfare.

Keywords: double-marginalization problems; market-share contracts; vertical restraints (search for similar items in EconPapers)
JEL-codes: L10 L40 L42 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/ajle-2013-0002

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