Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Monday, January 12, 2009

Price Discrimination Between Retailers With and Without Market Power

Posted by D. Daniel Sokol

Barick Chung (Department of Economics, Chinese University of Hong Kong) and Eric Rasmusen     (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) discuss Price Discrimination between Retailers with and without Market Power in their latest working paper.

ABSTRACT: Some retail markets are more competitive than others. A manufacturer with market power in the wholesale market who sells his product to competing retailers in cities and monopolistic ones in each of various towns must set the wholesale price difference between towns and cities to be smaller than the transportation cost to prevent “grey market” arbitrage. If he uses linear pricing, the town retail price will be even higher than under single-retailer double marginalization. Two-part tariffs do not solve the problem as they would if there were a single retailer, because the wholesale unit price must be higher than marginal cost to prevent arbitrage to the cities. If transportation costs are low, price discrimination is difficult and two- part tariffs come to resemble inefficient linear monopoly pricing. High transportation costs allow greater efficiency in contracting, and this can outweigh the negative direct effect on welfare.

January 12, 2009 | Permalink | Comments (0) | TrackBack (0)

Sunday, January 11, 2009

The Effects of Capacity on Sales Under Alternative Vertical Contracts

Posted by D. Daniel Sokol

Ioannis Ioannou (PhD student, Harvard Business School), Julie Holland Mortimer (Harvard - Economics), and Richard Mortimer (Analysis Group) explain the The Effects of Capacity on Sales Under Alternative Vertical Contracts.

ABSTRACT: Retailer capacity decisions can impact sales for a product by affecting, for example, availability and visibility. Using data from the U.S. video rental industry, we report empirical estimates of the effect of capacity on sales. New monitoring technologies facilitated new supply contracts in this industry, which lowered the upfront cost of capacity and required minimum capacity purchases, thus strongly impacting stocking decisions. Under the traditional supply contract, capacity costs $44 per tape (avg) and the marginal tape produces 10.4 to 18.0 additional rentals. Under the new contract, capacity costs $7 per tape (avg) and the marginal tape produces 0 to 4.9 additional rentals.

January 11, 2009 | Permalink | Comments (0) | TrackBack (0)