Monday, January 21, 2008
Posted by D. Daniel Sokol
Felix Höffler (Max Planck Institute of Research on Collective Goods) and Klaus M. Schmidt (Ludwig Maximilians University of Munich, Faculty of Economics) provide Two Tales on Resale in their most recent working paper.
ABSTRACT: In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.