Antitrust & Competition Policy Blog

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

Friday, July 22, 2011

Vertical Limit pricing

Posted by D. Daniel Sokol

Aggey Semenov (Department of Economics, University of Ottawa, Ottawa, ON) and Julian Wright (Department of Economics, National University of Singapour) address Vertical Limit pricing.

ABSTRACT: A new theory of limit pricing is provided which works through the vertical contract signed between an incumbent manufacturer and a retailer. We establish conditions under which the incumbent can obtain full monopoly profits, even if the potential entrant is more efficient. A key feature of the optimal vertical contract we describe is quantity discounting, typically involving three-part incremental-units or all-units tariffs, with a marginal wholesale price that is below the incumbent’s marginal cost for sufficiently large quantities.

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