Vertical Contracts That Reference Rivals

Fan Liu (), David S. Sibley () and Wei Zhao ()
Additional contact information
Fan Liu: Nankai University
David S. Sibley: The University of Texas at Austin
Wei Zhao: Competition Economics LLC

Review of Industrial Organization, 2020, vol. 56, issue 2, No 9, 407 pages

Abstract: Abstract We study two types of vertical contracts that reference rivals: the “vertical price constraint” (VPC) requires retail prices for a manufacturer’s product to be no higher than for its competitors’ products. The “vertical margin constraint” (VMC) requires retail margins for a manufacturer’s product to be no higher than for its competitors’ products. These agreements are found in the soft drink and cigarette industries, and in travel platforms. With two asymmetric manufacturers, we find that only the larger adopts a VPC in a subgame perfect equilibrium. We also analyze incentive compatibility issues with optional VPC agreements. Apart from leading to increased prices, the VPC leads to lower profits for the smaller manufacturer. In contrast, the VMC leads to lower prices. Under certain conditions, by adopting the VMC, a larger manufacturer will gain enough to compensate the retailer and still be better off, while making its competitor worse off. These two vertical contracts work because they alter the price elasticities of demand that face upstream manufacturers.

Keywords: Vertical contract; Vertical restraint; Margin constraint; Every day low price (search for similar items in EconPapers)
JEL-codes: D21 D49 L14 L42 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11151-019-09702-9 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:56:y:2020:i:2:d:10.1007_s11151-019-09702-9

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11151/PS2

DOI: 10.1007/s11151-019-09702-9

Access Statistics for this article

Review of Industrial Organization is currently edited by L.J. White

More articles in Review of Industrial Organization from Springer, The Industrial Organization Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().