Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 02/13: RESALE PRICE MAINTENANCE AND UP-FRONT PAYMENTS: ACHIEVING HORIZONTAL CONTROL UNDER SELLER AND BUYER POWER

Tommy Staahl Gabrielsen () and Bjørn Olav Johansen ()
Additional contact information
Tommy Staahl Gabrielsen: Department of Economics, University of Bergen, Postal: The university of Bergen, Department of Economics, Fosswinckelsgt. 14, 5007 Bergen
Bjørn Olav Johansen: Department of Economics, University of Bergen, Postal: The university of Bergen, Department of Economics, Fosswinckelsgt. 14, 5007 Bergen

Abstract: We consider a setting where an upstream producer and a competitive fringe of producers of a substitute product may sell their products to two differentiated downstream retailers. We investigate two different contracting games; one with seller power and a second game with buyer power. In each game we characterize the minimum set of vertical restraints that make the vertically integrated profit sustainable as an equilibrium outcome, and we also characterize sufficient conditions for having interlocking relationships (i.e. no exclusion). In line with the recent literature, we focus on the performance of simple two-part tariffs, upfront payments and RPM as facilitating devices for reducing competition under both buyer and seller power. With seller power we show that minimum RPM, possibly coupled with a quantity roof, will allow the manufacturer to induce industry wide monopoly prices. With buyer power we show that monopoly prices may be induced if the retailers may use an upfront fee together with a two-part tariff and a minimum RPM.

Keywords: resale price maintenance; seller power; buyer power; horsizontal control

JEL-codes: L42

36 pages, April 11, 2013

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