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Searches related to double marginalisation définition filetype:pdf

Vertical Relations: Double Marginalization, Price

Negotiation and Integration

Jean-Francois Houde

Cornell University & NBER

October 17, 2016

Vertical Relations1 / 41

Introduction: Vertical Contracting

Goal:Solve an externality problem between downstream and upstream rms I

Agency problem:Unmeasurable service quality

IPricing:Double marginalization

IUpstream competition:Exclusion of rival suppliers

IUnder-investment:Incomplete contractingDouble marginalization:Retailer does not internalize the loss in

revenue from setting prices above cost.Legal restrictions: I Resale-price maintenance(RPM) is illegal in the U.S. IWholesale price discriminationis illegal only if judged anticompetitive (almost never prosecuted) ITie-inandexclusive territoriesare judge by a rule of reason (technically illegal)

IVertical mergersare rarely prosecuted by the federal agenciesVertical RelationsDouble Marginalization2 / 41

Double Marginalization: Basic Model

Linear pricing contract:Manufacturer sets wholesale pricew I

Downstream rm (with market-power):

max p(pw)D(p)$D(p) +D0(p)(pw) = 0 I

Upstream rm (monopolist):

max w(wc)D(p(w))$D(p(w)) +D0(p(w))(wc)p0(w) = 0 I

Key result:As long asw>c,p>pVIandq F Downstream rm fails to internalize the prot loss to the manufacturer associated with selling fewer units thanqVI.Remedies: I

Two-part tari contract (i.e. franchising)

w=candF= (pVIc)qVI I

Resale-price maintenance

IMinimum quantity contracts

IVertical integrationVertical RelationsDouble Marginalization3 / 41

Testing for Double Marginalization

Source:Villas-Boas (2007)Data:The market for Yogurt in a Midwestern city I

Source:IRI

IMarket-structure:5 Manufacturers3 Retailers = 43 products

ISample:Product characteristics and sales over 104 weeksMixed-logit demand (omitting time dimension):

u ij=xjiipj+j+ij;i i +Di +i wherej2 f0;1;:::;Ng,Nis the number of brandsstores, andDi is a vector of demographic characteristics (age and income), and iN(0;1).The demand parameters are estimated as in Nevo (2001). I

Instruments:Aggregate cost-shocksproduct FEs (pretty weak...)Vertical RelationsDouble Marginalization4 / 41

Vertical Pricing

Assumption:Manufacturers are allowed to charge dierent wholesale prices for each retailer/product combination (i.e.wj)Notation:(again omitting the time dimension) I r: Ownership matrix at the retail level I w: Manufacturer ownership matrix (i.e. brands) Ir: Retail demand own and cross price derivative (i.e. rjk=@sk=@pj) Iw: Wholesale demand own and cross derivative (i.e. wjk=@sk=@wj)

I: Retail equilibrium pass-through matrix (i.e. kj=dpk=dwj)Identity:Manufacturer perceived demand slope depends on the

retailers' anticipated pricing decision wjk=@sk=@wj=NX l=1@sk@pldp ldw j;or w= TrTiming:Manufacturers set wholesale prices, and retailers determine retail prices knowing the entire vector of wholesale price

Vertical RelationsDouble Marginalization5 / 41

Vertical Contract 1: Linear Pricing

Retail supply relation:

(pj) :sj+X k rjk@sk@pj(pkwkcrj) = 0$pj=crj+wj+ ( rr)1 j;:sWholesale supply relation: (wj) :sj+X k wjk@sk@wj(wkcwk) = 0;where@sk@wj=NX l=1@sk@pldp ldw j $wj=cwj+ wTr1 j;:sEquilibrium pass-through (dierentiating retailers' FOC): (wf) :NX l=1" @sj@pl+X k rjk@2sk@pj@pl(pkwk) + rjk@sl@pj# |{z}quotesdbs_dbs2.pdfusesText_3