Friday, July 22, 2011
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.