We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in differentiated good price competition. The partial misalignment between the profit objectives within a partially integrated manufacturer-retailer hierarchy entails a higher retail price than under full integration. This 'information vertical effect' translates into an opposite 'competition horizontal effect': the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions.
In a dynamic storable good market where demand changes over time, we investigate the producer's strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producer's profitability, particularly when the producer cannot commit to future prices. We show that the producer's inventories act as a strategic device to mitigate the loss from the lack of commitment. Our results provide a rationale for the producer's inventory behavior that sheds new light on the well-documented empirical evidence about inventories.
In a dynamic storable good market where demand changes over time, we investigate the producer's strategic incentives to hold inventories in response to the possibility of buyer stockpiling. The literature on storable goods has demonstrated that buyer stockpiling in anticipation of higher future prices harms the producer's profitability, particularly when the producer cannot commit to future prices. We show that the producer's inventories act as a strategic device to mitigate the loss from the lack of commitment. Our results provide a rationale for the producer's inventory behavior that sheds new light on the well-documented empirical evidence about inventories.
In a vertically related market where the number of manufacturer‐retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free‐entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez‐faire and ban on resale price maintenance (RPM) under different entry decision modes. Under upstream entry, laissez‐faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, under downstream entry, a ban on RPM stimulates entry and consumer surplus, but laissez‐faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.
Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A consumer standard alleviates the regulator's myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find cost exaggeration less attractive. This reduces the need for long term rents and mitigates ratchet effects. The regulator's welfare standard biased towards consumers comes, however, at the cost of some allocative distortion from the genuine social welfare perspective. Hence, a trade-off results which favors strategic delegation when efficient firms are relatively likely.
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