Wednesday, September 4, 2019
Dennis Weisman, Kansas State University - Department of Economics explores The Interplay Between Upstream and Downstream Price Floors in Preventing Exclusionary Conduct.
ABSTRACT: This paper integrates two separate branches of the law and economics literature to demonstrate the two-sided risk of market exclusion by a vertically-integrated firm (VIF) with upstream and downstream market power. The ratio of retail to wholesale price-cost margins is key. A margin ratio that is “too low” results in a vertical price squeeze, whereas one that is “too high” creates incentives for the VIF to engage in non-price discrimination. Displacement ratios delineate the range of safe harbor margin ratios within which neither form of market exclusion arises. The admissible range of these margin ratios is decreasing in the degree of product substitutability and reduces to a single ratio in the limit as the competing products become perfect substitutes. The challenge for policymakers is to apply these pricing constraints judiciously to prevent market exclusion in accordance with a consumer-welfare standard while recognizing the risk that these protections can be appropriated and used strategically in the errant pursuit of a competitor-welfare standard.