on the patterns and wealth effects of vertical mergers we use industry commodity flows information to measure vertical relations in completed mergers from 1962 to 1996 almost one third of the mergers display vertical relatedness vertical merger activity is more intensive in the 1980s and 1990s and less so in the 1960s and the 1970s vertical mergers generate positive wealth effects that are significantly larger than those for diversifying mergers the wealth effects in vertical mergers are comparable to those in pure horizontal mergers

competitive non linear pricing and bundling we examine the impact of multiproduct nonlinear pricing on profit consumer surplus and welfare in a duopoly when consumers buy all their products from one firm the one stop shopping model nonlinear pricing leads to higher profit and welfare but often lower consumer surplus than linear pricing by contrast in a unit demand model where consumers may buy one product from one firm and another product from another firm bundling generally acts to reduce profit and welfare and to boost consumer surplus in a more general model where consumers may buy from more than one firm and where consumers have elastic demands for each product nonlinear pricing has ambiguous effects compared with linear pricing nonlinear pricing tends to raise profit but harm consumer surplus when i demand is elastic ii there is substantial product differentiation iii there is substantial heterogeneity in consumer demand iv consumers face substantial shopping costs when visiting more than one firm and v a consumer s brand preference for one product is strongly correlated with her brand preference for another product nonlinear pricing is more likely to lead to welfare gains when i ii iv and v hold but iii does not

contracts as a barrier to entry it is shown that an incumbent seller who faces a threat of entry into his or her market will sign long term contracts that prevent the entry of some lower cost producers even though they do not preclude entry completely moreover when a seller possesses superior information about the likelihood of entry it is shown that the length of the contract may act as a signal of the true probability of entry

exclusive contracts and protection of investments we consider the effect of a renegotiable exclusive contract restricting a buyer to purchase from only one seller on the levels of noncontractible investments undertaken in their relationship contrary to some informal claims in the literature we find that exclusivity has no effect when all investments are fully specific to the relationship i e are purely internal exclusivity does matter when investments affect the value of the buyer s trade with other sellers i e have external effects we examine the effects of exclusivity on investments and aggregate welfare and the private incentives of the buyer seller coalition to use it

a unified presentation of competition analysis in two sided markets the goal of this paper is to present quantitative tools to manage competition policy analysis in two sided platforms based on a common framework for transaction and non transaction platforms we explore tools for relevant market definition critical loss analysis and a small but significant non transitory increase in price ssnip test unilateral effects indicators upward pricing pressure upp and gross upward pricing pressure index guppi and tests for exclusionary practices we review dispersed results in the literature and fill the gaps where appropriate we highlight the required changes from the usual one sided market framework and tools while discussions of antitrust tools can be found in specialized forums devoted to advances in competition policy analysis we organize the material in an integrated framework

a new index of vertical integration some estimates for uk manufacturing abstract this paper proposes a new method for measuring the degree of vertical integration within a firm or industry it is based on the magnitude of intra firm flows of output across industries relative to the magnitude of market transactions while data on intra firm flows are often sketchy or non existent we show how they may be imputed indirectly from standard input output tables and information on market shares of firms across industries estimates are reported and analysed for uk manufacturing in 1986 for 79 industries and their leading firms thereby providing the first known comprehensive picture of vertical integration in the united kingdom

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

nonlinear pricing and exclusion ii must stock products dominant firms often are unavoidable trading partners buyers may consider switching a fraction of their requirements to rival products but that fraction is highly uncertain in rapidly evolving industries nonlinear pricing serves to adjust the competitive pressure placed on rival firms depending on the joint distribution of the buyer willingness to pay for the rival s good and the share of contestable demand concave price quantity schedules erect barriers to entry convex parts in schedules introduce barriers to expansion dominant firms use all units discounts to create high entry barriers for rival firms with intermediate levels of contestable demand

impact of information technology capital on firm scope and performance the role of asset characteristics this research draws on transaction cost and resource based theory to examine how information technology it capital moderates the relationship between different types of assets and firm scope both vertical integration and diversification the analysis suggests that it capital enables firms with narrowly valuable assets to be less vertically integrated and less diversified and enables firms with broadly valuable assets to be more vertically integrated and more diversified the moderating influence of it capital on the relationship between different types of assets and firms vertical and product market scope is consistent with transaction cost as well as resource based traditions abstract from author

vertical organization of production and firm growth this paper empirically explores if different vertical organizational forms i e vertical integration versus dis integration give rise to unlike growth behaviors within the same industry an econometric analysis is conducted in a sample of around 500 italian machine tool mt builders for the period 1998 2007 implementing instrumental variables to control for the endogeneity of the organizational form in the relation ceteris paribus vertically integrated firms result to be characterized by a less dispersed distribution of growth rates than their dis integrated counterparts several concurring factors such as adjustment costs organizational slacks and a better management of fluctuations in the markets of intermediate and final products may explain the more a stablea growth profile of vertically integrated firms by means of analyzing how different organizational forms map into the distribution of output growth rates this work provides insight into the firm dynamics in a mature industry in which both vertically integrated and dis integrated firms coexist

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

causes and effects of vertical intergration this paper sets out to define new measures of industry average forward and backward integration and incorporate them into an empirical stucture conduct performance model results suggest that integration is encouraged where there are relatively few firms in an industry and if sales are increasing forward integration occurs in reaction to large outgoing distribution margins backward integration acts to increase concentration at least in some parts of the manufacturing sector integratin has a complex and interactive effect on profitability serving sometimes to raise profitability and sometimes to lower it

exclusionary pricing in markets with interdependent demands in this paper i use a simple model to study the competitive effects of exclusionary pricing involving two markets related by a positive demand externality it is shown that below cost pricing on one of these markets can allow an incumbent firm to exclude from both markets a more efficient rival which does not have a customer base yet however when exclusion occurs it is always socially optimal in addition under some circumstances there is inefficient entry the entrant wins both markets while the social optimum would require the incumbent to win them

regulatory performance analysis case study britain s electricity industry the success or failure of the privatisation and liberalisation of electricity supply industries has more often been judged in terms of process than of outcomes in this paper in contrast this performance is assessed in terms of the performance of its associated system of regulatory governance taking the uk s electricity supply industry between 1989 and 2000 as case study initially a vertical cross section of the regulation system gives a finding matrix for the various stakeholders involved and identifying winners and losers from the standpoint of funding flows next a horizontal cross section provides the environmental distributive allocative dynamic and productive efficiencies grid for this system the survey shows that the performance of the british esi regulation system produced benefits although not for all stakeholders and not as fairly as possible the chosen path did not seem sustainable and failed to respect intergenerational transfers as a way of fostering sustainability and equity it was unable to underpin simultaneous improvements in efficiencies over time while redistributing industry s funding flows among the players in a regressive manner

competitive price discrimination we model firms as supplying utility directly to consumers the equilibrium outcome of competition in utility space depends on the relationship u between profit and average utility per consumer public policy constraints on the deals firms may offer affect equilibrium outcomes via their effect on u f rom this perspective we examine the profit utility and welfare implications of price discrimination policies in an oligopolistic framework we also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two part tariffs

vertical foreclosure with the choice of input specifications we develop an equilibrium model of vertical foreclosure with the choice of input specifications vertical foreclosure occurs as the upstream division of the integrated firm makes a specialized input for its sister downstream division while it would as an independent firm provide a generalized input the changes in incentives with vertical integration can be explained by the externalities the choice of a specialized input entails vertical integration allows the upstream firm to internalize the benefit of raising the rival firm s costs at the downstream level we derive conditions for equilibrium vertical foreclosure to occur and discuss its welfare consequences

measurement of vertical integration an index of vertical integration is constructed as a tool to examine how the average level of vertical integration has changed over time the hypothesis that if vertical integration can lower costs or reduce risks more firms will integrate vertically is subjected to an empirical test using the vertical industry connection index a randem sample of firms is selected from the compusat data base the results support the contention that vertical integration has increased in contrast with laffer s findings 17 references 10 figures 3 tables

exclusionary vertical contracts and product market competition this article considers whether a monopolist is able to deter more efficient entrants through contracting with buyers in the antitrust literature the chicago school s stand is that such contracts cannot be anticompetitive hence vertical contracts should be accorded per se legal status in a four stage game with the following features 1 the incumbent enjoys a first mover advantage 2 the entrant must incur some sunk cost to enter the market and 3 entry is uncertain the author shows that vertical contracts can be anticompetitive if there exists product market competition thus the author advocates caution in treating all contracts as per se legal a three factor repeated measures experiment tested the effect of leadership style charismatic structuring and considerate on performance improvement on a manufacturing task over four trials findings from a repeated measures multivariate analysis of variance indicated that individual exposed to considerate leadership had superior initial performance but that this difference faded over time further analysis indicated that self efficacy fully mediated the relationship between leadership style and performance copyright 1999 by university of chicago press

the competitive effects of vertical agreements comment recent economic analyses of vertical restraints and integration emphasize the circumstances under which these arrangements are socially efficient efficiency claims have proven contentious however for exclusive dealing a vertical restraint that prohibits any outlet carrying a manufacturer s product from stocking substitute brands this paper analyzes the impact of exclusive dealing on competition and allocative efficiency opinions expressed on the impact of exclusive dealing range from the extreme view that it is invariably anticompetitive to the view that it is always procompetitive the u s supreme court has concluded that in hundreds if not thousands of communities where there is a single retailer for a product

an equilibrium selection theory of monopolization we develop a duopoly model in which firms compete for the market e g investing in process innovation or product development as well as in the market e g setting quantities or prices competition for the market generates multiple equilibria that differ in the firms investment levels relative size and profitability we show that monopolization that affects competition in the market can act as an equilibrium selection device in competition for the market in particular it eliminates equilibria that are undesirable for the monopolizing firm while not generating new equilibria this result complicates the task of determining whether a firm s dominance in a given market is the result of fair competition or unlawful monopolization we discuss a number of implications for antitrust policy and litigation and illustrate these by means of two well known antitrust cases

discounts as a barrier to entry abstract to what extent can an incumbent manufacturer use discount contracts to foreclose efficient entry we show that off list price rebates that do not commit buyers to unconditional transfers like the rebates in eu commission v michelin ii for instance cannot be anticompetitive this is true even in the presence of cost uncertainty scale economies or intense downstream competition all three market settings where exclusion has been shown to emerge with exclusive dealing contracts the difference stems from the fact that unlike exclusive dealing provisions rebates do not contractually commit retailers to exclusivity when signing the contract jel d43 d86 k21 l13 l14 l42 l60

loyalty discounts and price cost tests abstract we analyze by means of a formal economic model the use of the discount attribution test to assess the competitive effects of loyalty discounts the discount attribution test is a variant of the price cost test where the discount is attributed only to the share of total demand that is regarded as effectively contestable in the model a dominant firm enjoys a competitive advantage over its rivals and uses market share discounts to boost the demand for its own products in this framework we show that the attribution test is misleading or at best completely uninformative our results cast doubts on the applicability of price cost tests to loyalty discount cases

exclusive dealing investment promotion may facilitate inefficient foreclosure this paper studies a model whereby exclusive dealing ed can both promote investment and foreclose a more efficient supplier since ed promotes the incumbent seller s investment the seller and the buyer realize a greater surplus from bilateral trade under exclusivity hence the parties involved may sign an ed contract that excludes a more efficient entrant in circumstances where ed would not arise absent investment the paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ed

presidential address antitrust restrictions on single firm strategies this article offers an overview of selected developments in the law and economics of antitrust regulation of single firm strategies the strategy generating the most cases historically is resale price maintenance here the law has moved sharply in both canada and the u s towards more solid economic foundations yet a gap between the law and economics remains the economics of resale price maintenance is reviewed within a framework that is much simpler and more general than the existing literature the law on a second strategy predatory pricing represents in my view a success story for the influence of economic theory in spite of the absence of a single accepted theory of predatory pricing the remaining single firm strategies are concerned largely with the exclusion by a dominant firm of rivals from a market i review with application to cases the two most basic questions concerning exclusionary strategies are exclusionary anticompetitive contracts ever entered into voluntarily by market participants on the other hand is complete or substantial foreclosure of a market through exclusionary strategies necessarily anticompetitive cette allocution presidentielle a l association canadienne d economique presente une vue d ensemble des developpements dans le droit et l economie de la reglementation antitrust sur les strategies d une firme unique la loi sur la strategie qui genere historiquement le plus de cas le maintien du prix de revente a change dramatiquement au canada et aux etats unis et derive vers une politique qui a des assises economiques solides mais il reste un ecart entre le droit et l economie on reexamine l economie du maintien du prix de revente a l aide d un cadre d analyse qui est a la fois plus simple et plus general que ce qui existe dans la litterature specialisee la loi pour ce qui est d une seconde strategie prix d eviction est a mon avis une grande reussite pour la science economique malgre l absence d une seule theorie du prix d eviction generalement acceptee un troisieme ensemble de strategies concerne l exclusion de ses rivaux d un marche par la firme dominante l auteur reexamine avec un recours extensif aux cas les deux questions de base pour ce qui est des strategies d exclusion est ce que les participants sur un marche entrent jamais volontairement dans un arrangement contractuel qui exclut et est anticoncurrentiel d autre part est ce que la saisie complete ou substantielle d un marche par des man uvres d exclusion est necessairement anticoncurrentielle

merger in the english electricity industry this paper compares consumer prices under vertical integration and verticial separation of the electricity industry in england and wales and considers the costs and benefits of mergers between electricity supply and water companies the impact of vertical integration is important given the proposals for merger between electricity generating and supply companies in 1996 the paper concludes that there could be small benefits to consumers if competition in the electricity industry is limited in a fully competitive industry the impact of vertical integration on the consumer is neutral regarding competition vertical merger might limit the extent of new firm entry in the electricity supply market after liberalisation in 1998 inter industry merger will yield cost savings but may limit new firm entry in electricity supply

on countervailing incentives abstract this paper extends and unifies previous work on optimal contracts under countervailing incentives shedding light in particular on the relation between countervailing incentives and pooling inflexible rules our main result is that the nature of the optimal contract depends crucially on whether the agent s utility is quasiconcave or quasiconvex in the private parameter the optimal contract is separated in the former case and it may entail pooling in the latter case journal of economic literature classification number d82

rebates as incentives to exclusivity we show how rebates or fidelity discounts that take the form of lump sum payments made to retailers can be used by an incumbent manufacturer to achieve exclusivity and to deter the entry of a more efficient rival the results which hold whatever the degree of differentiation between retailers and whatever the cost advantage of the entrant are found despite minimizing asymmetries that may favour the incumbent as such there is no need to introduce buyers disorganization discriminatory offers economies of scale non coincident markets or liquidated damages to find that exclusivity can lead to anti competitive effects

market participation in delegated and intrinsic common agency games we study how competition in nonlinear pricing between two principals sellers affects market participation by a privately informed agent consumer when participation is restricted to all or nothing intrinsic agency the agent must choose between both principals contracts and selecting her outside option when the agent is afforded the additional possibilities of choosing only one contract delegated agency competition is more intense the two games have distinct predictions for participation intrinsic agency always induces more distortion in participation relative to the monopoly outcome and equilibrium allocations are discontinuous for the marginal consumer under delegated agency relative to monopoly market participation increases respectively decreases when contracting variables are substitutes respectively complements on the intensive margin equilibrium allocations are continuous for the marginal consumer and the range of product offerings is identical to both the first best and the monopoly outcome

economies of integration versus bureaucracy costs does vertical integration improve performance this study tested links between vertical integration cost structure and performance at the line of business level of analysis major findings were 1 vertical integration results in economies ev

a more general theory of commodity bundling this paper extends the standard model of bundling as a price discrimination device to allow products to be substitutes and for products to be supplied by separate sellers whether integrated or separate firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand alone products product substitutability typically gives an integrated firm a greater incentive to offer a bundle discount relative to the model with additive preferences while substitutability is often the sole reason why separate sellers wish to offer inter firm discounts when separate sellers coordinate on an inter firm discount they can use the discount to overturn product substitutability and relax competition

exclusive quality exclusive quality in the case of vertically differentiated products bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high quality rival indeed because of differentiation the incumbent s inferior product is not eliminated upon entry due to the resulting competitive pressure a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent s monopoly rents thus in equilibrium the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion this is true under linear pricing for intermediate levels of entry costs and with two part tariffs even in the absence of entry costs copyright 2010 the author the journal of industrial economics 2010 blackwell publishing ltd and the editorial board of the journal of industrial economics

the british electricity experiment the privatization of the electricity supply industry esi in britain which began 1990 is in itself an unremarkable event much of the esi is privately owned in several european countries and in the united states and the u k privatization program has embraced utilities since 1984 when british telecom was privatized the thing that is remarkable about recent policy toward the industry is the radical nature of the regulatory reform accompanying privatization a vertically integrated administered generation and transmission structure was replaced overnight on march 31 1990 by one that is deintegrated and market based generation and transmission have been separated and there has been an attempt to establish competition in generation a number of countries have been moving gradually in the direction of encouraging competition but nowhere else have such dramatic changes been implemented so quickly

exclusive dealing and entry when buyers compete rasmusen et al 1991 and segal and whinston 2000 show that an incumbent monopolist might prevent entry of a more efficient competitor by exploiting externalities among buyers we show that their results hold only when downstream competition among buyers is weak under fierce downstream competition if entry took place a free buyer would become more competitive and increase its output and profits at the expense of buyers that sign an exclusive deal with the incumbent anticipating that orders from a single buyer would trigger entry no buyer will sign the exclusive deal and entry will occur this result is robust across different specifications of the game jel k21 l12 l42

contracts and externalities how things fall apart a single principal interacts with several agents offering them contracts the crucial assumption of this paper is that the outside option payoffs of the agents depend positively on how many uncontracted or free agents there are we study how such a principal unwelcome though he may be approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out two variants are considered when the principal cannot re approach agents there is a unique equilibrium in which contract provision is split up into two phases in phase 1 simultaneousoffers at good though varying terms are made to a number of agents in phase 2 offers must be made sequentially and their values are discontinuously lower they are close to the very lowest of all the outside options when the principal can repeatedly approach the same agent there is a multiplicity of equilibria in some of these the agents have the power to force delay they can hold off the principal s overtures temporarily but they must succumb in finite time in both models despite beingable to coordinate their actions agents cannot resist an invasion by the principal and hold to their best payoff it is in this sense that things eventually fall apart

naked exclusion an experimental study of contracts with externalities this paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts we use the strategic environment described by rasmusen ramseyer and wiley 1991 and segal and whinston 2000 where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent when discrimination is impossible the game resembles a stag hunt coordination game in which the buyers payoffs are endogenously chosen by the incumbent seller exclusion occurs when the buyers fail to coordinate on their preferred equilibrium two way non binding pre play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller when discrimination and communication are possible the exclusion rate rises divide and conquer strategies are observed more frequently when buyers can communicate with each other exclusion rates are significantly higher when the buyers payoffs are endogenously chosen rather than exogenously given finally secret offers are shown to decrease the incumbent s power to profitably exclude

nonlinear pricing with random participation the canonical selection contracting programme takes the agent s participation decision as deterministic and finds the optimal contract typically satisfying this constraint for the worst type upon weakening this assumption of known reservation values by introducing independent randomness into the agents outside options we find that some of the received wisdom from mechanism design and nonlinear pricing is not robust and the richer model which allows for stochastic participation affords a more general empirical specification we develop a multidimensional methodology for addressing this class of problems providing two important applications to nonlinear pricing first with nonlinear pricing by a monopolist the familiar nodistortion at the top result persists but in tandem with the surprising conclusion that there is either no distortion at the bottom or bunching second in a simple model of product differentiated duopolists competing with nonlinear pricing we show that generally the duopoly outcome is qualitatively similar to the monopoly outcome however when marginal costs are symmetric and competition is sufficiently intense distortions disappear and the equilibrium outcome takes a remarkably simple form efficient quality allocations with cost plus fee pricing

cost pass through and inverse demand curvature in vertical relationships with upstream and downstream competition this paper provides two characterizations of the retailer s markup relative to the manufacturer s markup in vertical relationships with homogeneous manufacturers and homogeneous retailers we first show that retailer s relative markup is equal to the ratio of the retail pass through to the wholesale pass through multiplied by the number of manufacturers relative to the number of retailers we then provide its expression in terms of the inverse demand curvature

participation constraints in adverse selection models abstract this paper characterizes the optimal contract offered by an uninformed principal to an informed agent when the latter s reservation utility depends on his type the informational rent is nonmonotonic so that interior types may have a vanishing rent or be excluded from trade the paper identifies conditions for the optimal contract to be separating to be nonstochastic and to induce full participation it also discusses the nature of the solution when bunching occurs the results are applied to nonlinear pricing under price cap regulation and bypass competition and to competition in nonlinear pricing journal of economic literature classification numbers d82 d42 d23 d78 l51 l15

exclusion via non exclusive contracts we establish that non linear vertical contracts can allow an incumbent to exclude an upstream rival in a setting that does not rely on the exclusivity of the incumbent s contracts with downstream firms or any limits on distribution channels available to the incumbent or rival the optimal contract we describe is a three part quantity discounting contract that involves the payment of an allowance to a downstream distributor and a marginal wholesale price below the incumbent s marginal cost for sufficiently large quantities the optimal contract is robust to allowing parties to renegotiate contracts in case of entry l exclusion par le biais des contrats non exclusifs nous etablissons que des contrats verticaux non lineaires peuvent permettre a un titulaire d exclure un rival en amont dans un cadre qui ne de pend pas de l exclusivite des contrats du titulaire avec les entreprises en aval ou des limites sur les canaux de distribution disponibles pour le titulaire ou un rival le contrat optimal que nous decrivons est un contrat de rabais en trois parties base sur la quantite pre voyant le versement d une indemnite a un distributeur en aval et un prix de gros marginal inferieur au cout marginal de l operateur historique pour des quantites suffisamment importantes le contrat optimal est robuste si on permet aux parties de renegocier les contrats en cas d entree

differential taxation and occupational choice we develop a framework to study optimal sector specific taxation where each agent chooses an occupation by comparing her skill differential with the tax burden differential across sectors because skills are not perfectly transferable the diamond mirrlees theorem according to which the second best entails production efficiency fails social welfare can be increased by inducing some agents to join the sector in which their productivity is not the highest at the optimum income taxes balance the marginal losses from inter sector migration with the marginal gains from tailoring tax schedules to the distribution of productivities in each sector tagging a calibrated model indicates that sector specific taxation generates substantive welfare gains when skill transferability decreases with income as it enables the government to increase average taxes on high earners with large wage premia

nonlinear pricing and price cap regulation abstract this paper analyzes profit maximizing nonlinear pricing by a firm that is subject to price cap regulation two forms of regulatory constraint are considered i a cap on the firm s average revenue and ii a constraint that the firm must continue to offer each consumer the option of buying at the uniform price optimal nonlinear price schedules in these regimes are shown to have simple characterizations that are related to the nonlinear tariffs that an unregulated monopolist would charge of the regulatory regimes the firm prefers the average revenue constraint to the option constraint and likes uniform pricing least consumers in aggregate prefer the option regime to uniform pricing and like the average revenue constraint least but there are also distributional effects between consumers although the optional tariff regime pareto dominates uniform pricing it is ambiguous whether welfare is higher under uniform pricing or under the average revenue regime an example is used to illustrate the nature of the ambiguity

the revelation and delegation principles in common agency games in the context of common agency adverse selection games we illustrate that the revelation principle cannot be applied to study equilibria of the multi principal games we then demonstrate that an extension of the taxation principle what we term the delegation principle can be used to characterize the set of all common agency equilibria this abstract was borrowed from another version of this item

exclusive dealing as a barrier to entry evidence from automobiles exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market we ask whether such contracts may act as an entry barrier and provide an empirical analysis of the european car market we first estimate a demand model with product and spatial differentiation and quantify consumers valuations for dealer proximity and dealer exclusivity we then perform policy counterfactuals to assess the profit incentives and possible entry deterring effects of exclusive dealing we find that there are no unilateral incentives to maintain exclusive dealing but there is a collective incentive for the industry as a whole furthermore a ban on exclusive dealing would raise the smaller entrants market share but more importantly consumers would gain not so much because of increased price competition but rather because of the increased spatial availability which compensates for the demand inefficiency from a loss of dealer exclusivity

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

the commitment value of contracts under dynamic renegotiation we examine why different renegotiation processes can lead to opposite results regarding the commitment value of third party contracts in the presence of asymmetric information our main result is that a contract loses all strategic value if renegotiation is allowed during the production stage rather than only before production begins this result casts serious doubt on the relevance of previous findings which emphasize how contracts can have commitment value even in the presence of renegotiation our analysis can also be used to understand the differences between many of the results in the renegotiation literature

extracting interaction created surplus abstract this paper demonstrates that the economic surplus which agents produce in bilateral interactions is extractable by an outside party having sufficient initial resources the third party achieves this outcome using a class of exclusive interaction contracts a basic extractability result is shown to be robust to several extensions competition among outside parties multiplicity of interacting agents and a dynamic extension with repeated opportunities to interact finally some connections with the economic intermediation literature are drawn journal of economic literature classification number c79

competitive screening under heterogeneous information we study the interplay between informational frictions and second degree price discrimination our theory recognizes that consumers differ in their tastes for quality as well as in the information they possess about available offers which leads to dispersion over price quality menus in equilibrium while firms are ex ante identical we show that their menus are ordered so that more generous menus leave more surplus to consumers of all valuations we explore the cross section of equilibrium menus and variations in market conditions to generate empirical predictions on prices qualities and markups across firms and within a firm s product line for instance more competition may raise prices for low quality goods yet consumers are better off as the qualities they receive also increase the predictions of our model illuminate empirical findings in many markets such as those for cell phone plans yellow pages advertising cable tv and air travel

inventorship and authorship as attribution rights an enquiry into the economics of scientific credit abstract authorship and inventorship are attribution rights upon which individual scientists build their reputation and career social and legal norms concerning their distribution within research teams are currently criticized for failing to inform third parties on individual contributions we examine the case of teams engaged in the double disclosure of their research results through both publications and patents and model the negotiation process taking place between junior or female team members and the senior male ones we suggest that the former may give up inventorship in order to secure authorship even when entitled to the both based on a sample of 680 patent publication pairs related sets of patents and publications we show that very frequently one or more authors of a publication do not appear as inventors of a related patent this is less likely to happen for first and last authors which is in accordance both with our model and the prevailing legal norms on inventorship however the probability of exclusion from inventorship also declines with seniority and increases for women which is compatible with our model only

customer coalitions monopoly price discrimination and generic entry deterrence abstract this paper analyzes the interplay between a profit maximizing monopolist and a set of consumers who are able to form coalitions that bargain with the monopolist and or integrate into production we show that the monopolist will deter the formation of these countervailing coalitions through strategic selection of generic limit price offers to each consumer these limit prices are derived as subgame perfect equilibria in two alternative models of customer monopoly interplay in both models price discrimination emerges in environments wherein it has previously been considered unprofitable welfare analysis of the equilibria demonstrates the procompetitive effects of potential customer coalitions and generally provides an efficiency based motivation for a government ban on price discrimination

naked exclusion comment the ability of an incumbent firm to deter entry by writing exclusionary contracts with customers has been a subject of contention in the antitrust literature the courts concern with such exclusionary contracts has been challenged by those who argue that an incumbent faced with buyers whose interest is to promote entry and competition would have to pay buyers more for the inclusion of exclusionary provisions than it could possibly gain from exclusion in a provocative article eric b rasmusen et al 1991 henceforth rrw have argued that an incumbent may in fact be able to exclude rivals profitably using such contractual provisions because it can exploit buyers lack of coordination in essence if buyers expect other buyers to sign such provisions then they may see little reason not to do so themselves the rrw argument is potentially an important one because most alleged instances of entry deterrence through exclusionary contracts with customers occur in situations with multiple buyers unfortunately however rrw s two main results contain errors in this note we reconsider the rrw model providing correct characterizations of the likelihood and cost of exclusion for an incumbent firm our results indicate that while the intuition suggested by rrw is valid the equilibrium likelihood and cost of exclusion differ from what rrw derive moreover our analysis illuminates some further aspects of exclusionary contracting with multiple buyers among these issues we focus on how an incumbent can use discriminatory offers to exploit the externalities that exist among buyers in the provision of competition in section i we review the basic assumptions of the rrw model in sections ii and iii we then consider in turn the cases of simultaneous and sequential offers studied by rrw for the simultaneous model we distinguish between settings in which the incumbent can and cannot discriminate in its offers to different buyers this distinction is the source of the problem in rrw s analysis their simultaneous offer model assumes no discrimination but the proof of their proposition 2 assumes at times that discrimination is feasible we show that absent the ability to discriminate the incumbent can exclude profitably only when buyers fail to coordinate on their most preferred continuation equilibrium in contrast we show that when discrimination is possible the incumbent need not rely on a lack of buyer coordination to segal department of economics landau building stanford university stanford ca 94305 e mail ilya segal stanford edu whinston department of economics northwestern university 2003 sheridan road evanston il 60208 e mail mwhinston nwu edu we thank eric rasmusen john wiley and participants in the berkeley stanford iofest the university of copenhagen vertical restraints conference and a seminar at the antitrust division of the u s department of justice for helpful comments we thank federico echenique for excellent research assistance 1 for example a recent department of justice investigation concerned the use of exclusive contracts by the leading provider of computerized ticketing services ticketmaster most major cities have several large concert sports venues in many cities ticketmaster has exclusive contracts with a very large share of these venues 2 the other leading response to the argument that contracts with buyers cannot be a profitable method of exclusion is given in philippe aghion and patrick bolton 1987 section i one factor limiting the applicability of the aghion and bolton theory however is that it involves partial exclusion the contracts signed are not fully exclusionary they involve finite stipulated damages and the profitability of the strategy arises from extracting rents from an entrant when entry occurs indeed in the aghion and bolton model contracts that fully exclude offer no benefits over writing no contract at all in section iii of their paper aghion and bolton also discuss a two buyer version of their model in which externalities arise across buyers in contrast to the analysis here and in rrw they allow the incumbent to make an offer to a buyer i that is conditional on the acceptance decision of the other buyer 3 r innes and r j sexton 1994 also discuss the use of discriminatory offers in the context of a model in which buyers can form coalitions with the entrant

liberalisation of the russian power sector abstract the paper discusses the russian power sector reform plan approved by the government in july 2001 which outlines the framework for competition and changes in ownership structure the paper focuses on the following issues related to the plan price reform restructuring of regional energos and large generating companies restructuring of transmission and system operation the mechanism for introducing competition competition for residential consumers and reform sequencing one key message of the paper is that price and regulatory reform is central to success of market liberalisation a second key message is that the restructuring of energos should not create companies with market power ideally local generation and distribution companies would be owned separately with multiple generators in each region at a minimum commonly owned companies should keep separate accounts with regulation of generation a possibility where there is market power regarding transmission and dispatch common ownership would not be a problem given that transmission and generation are separately owned on competition a fully fledged pool may not be appropriate in the case of russia with the alternative of a market based on bilateral contracts with a balancing pool functioning better in a context of non payment and constrained institutional capacity and providing security for investments regarding competition for residential consumers this is not a priority in the short to medium term lastly on sequencing it is better that structural and institutional change takes place before competition begins

competition with exclusive contracts and market share discounts we analyze firms that compete by means of exclusive contracts and market share discounts conditional on the seller s share of customers total purchases with incomplete information about demand firms have a unilateral incentive to use these contractual arrangements to better extract buyers informational rents however exclusive contracts intensify competition thus reducing prices and profits and in all pareto undominated equilibria increasing welfare market share discounts by contrast produce a double marginalization effect that leads to higher prices and harms buyers we discuss the implications of these results for competition policy jel d43 d83 d86 k21 l14 l42 in this paper we study firms that compete by means of exclusive contracts or mar ket share discounts i e discounts that depend on the seller s share of a customer s total purchases these are common yet seldom studied forms of competition the literature has mainly focused on incumbents use of exclusive contracts or marketshare discounts to deter new entrants whilst paying less attention to competitors deploying similar pricing strategies we show that exclusive contracts intensify competition reducing equilibrium prices whereas market share discounts have a double marginalization effect and hence result in higher prices these findings have a bearing on the current lively policy debate 1 fueled by the fact that antitrust authorities view competition by means of exclusive contracts or marketshare discounts with some suspicion to say the least the authorities main concern appears to be that a dominant firm can use exclusivity or market share discounts to eliminate not only potential competitors but also existing ones a prime instance of this is the case of intel intel whose main competitor amd has been operating for years in the microchip sector offered electronics manufacturers discounts that depended on their buying a minimum share of their total purchases of microchips from intel some customers to qualify for the discount had to opt for an exclusive supply contract that

exclusive dealing before bork and beyond abstractantitrust scholars have come to accept the basic ideas about exclusive dealing that bork articulated in the antitrust paradox indeed they have even extended his list of reasons why exclusive dealing can promote economic efficiency yet they have also taken up his challenge to explain when exclusive dealing might possibly cause harm and have modeled a variety of special cases where it does some albeit not all of these are sufficiently plausible to be useful to prosecutors and judges

on the economic efficiency of liquidated damages abstract recently aghion and bolton american economic review 1987 77 388 401 have shown that liquidated damages can serve as a barrier to entry and may therefore be socially harmful in this paper i show that liquidated damages remain excessive and continue to serve as a barrier to entry even in the presence of relationship specific investment but may nevertheless have an overall positive effect on welfare

upfront payments and exclusion in downstream markets although upfront payments are often observed in contracts between manufacturers and retailers little is known about their competitive effects or the role retailers play in securing them in this article we consider a model in which two competing retailers make take it or leave it offers to a common manufacturer we find that upfront payments are a feature of equilibrium contracts and in all equilibria only one retailer buys from the manufacturer these findings support the claims of small manufacturers who argue that they are often unable to obtain widespread distribution for their products because of upfront payments copyright 2007 rand

the dynamics of make or buy decisions abstract make or buy decisions are strategically important for business firms particularly when production and marketing of components involves specialized technology and assets recent theories of make or buy decisions compare the cost of administering transactions inside a firm and across markets in this paper we extend these theories to a dynamic market in which profit from the use of specialized assets declines over time due to entry and substitution of technology using optimal control theory we investigate the patterns of vertical integration under different parametric conditions we also prevent empirical evidence from time series and cross sectional data that lend support to the analytical results from the model

upgrades switching costs and the leverage theory of tying this article investigates the role of product upgrades and consumer switching costs in the tying of complementary products previous analyses have found that a monopolist of one product will not increase its profits and reduce social welfare by tying and leveraging its monopoly position into a complementary market if the initial monopolised product is essential where essential means that all uses of the complementary good require the initial monopolised product we show that this is not true in settings characterised by product upgrades and consumer switching costs we also discuss various extensions including the role of the reversibility of tying

the rise of economics in competition policy a canadian perspective competition policy in canada and elsewhere has changed remarkably over the last 50 yearsin large measure due to advances in economics in this article we trace the impact of developments in industrial organization on the three central areas of competition policy cartels single firm conduct and mergers we focus on canadian competition policy but draw comparisons with developments in the united states and europe

nonlinear pricing and exclusion i buyer opportunism we study the exclusionary properties of nonlinear price quantity schedules in an aghion bolton style model with elastic demand and product differentiation we distinguish three regimes depending on whether and how the price charged by the dominant firm depends on the quantity purchased from the rival firm we find that the supply of rival good is distorted downward moreover given the quantity supplied from the rival the buyer may opportunistically purchase inefficiently many units from the dominant firm to pocket quantity rebates we show that the possibility for the buyer to dispose of unconsumed units attenuates the opportunism problem and limits the exclusionary effects of nonlinear pricing

endogenous games and mechanisms side payments among players we characterize the outcomes of games when players may make binding offers of strategy contingent side payments before the game is played this does not always lead to efficient outcomes despite complete information and costless contracting the characterizations are illustrated in a series of examples including voluntary contribution public good games cournot and bertrand oligopoly principal agent problems and commons games among others

the demand boost theory of exclusive dealing this paper unifies various approaches to the analysis of exclusive dealing that so far have been regarded as distinct the common element of these approaches is that firms depart from efficient pricing raising marginal prices above marginal costs we show that with distorted prices exclusive dealing can be directly profitable and anticom petitive provided that the dominant firm enjoys a strong competitive advantage over rivals the dominant firm gains directly rather than in the future or in adjacent markets thanks to the boost in demand it enjoys when buyers sign exclusive contracts we discuss the implication of the theory for antitrust policy

the timing of mergers along the production chain capital structure and risk dynamics abstract i demonstrate that the timing of vertical mergers is generally dependent on industry characteristics my predictions are consistent with empirically observed patterns of vertical mergers i show that merger activity during economic upturns tends to be motivated by operating efficiencies while merger activity during economic downturns tends to occur as a means of keeping production chain operational mergers allow firms to capture synergies and improve efficiencies in order to survive economic contractions the pricing framework implies that a vertical merger decision usually reduces risk during two different economic states

does retailer power lead to exclusion this article examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers who have no bargaining power from obtaining adequate distribution in contrast to the findings of marx and shaffer 2007 who show that all equilibria involve limited distribution i e exclusion of a retailer we show that there is always an equilibrium in which full distribution is obtained provided that full distribution is the industry profit maximizing outcome the key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff

buyer power and intrabrand coordination we analyze the competitive effects of vertical contracts in a contracting situation where rival retailers offer contracts to a manufacturer in contrast to bernheim and whinston 1998 who study the situation in which competing manufacturers offer contracts to a common retailer we find that two part tariffs even if contingent on exclusivity or not do not suffice to implement the monopolyoutcome richer arrangements including e g conditional fixed fees and upfront payments are thus required to internalize all contracting externalities the welfare implications are ambiguous on the one hand richer contracts ensure that no efficient retailer is excluded on the other hand they allow firms to maintain monopoly prices despite intrabrand competition simulations suggest that the latter effect may be more significant

strategic ex ante contracts rent extraction and opportunity costs this article cosiders the possibility that a seller can contract with one uninformed buyer prior to an auction involving two potential buyers the seller s optimal strategic ex ante contract more accurately reflects joint opportunity costs of the seller and the contracted buyer and therefore extracts more rent from the entrant moreover this ex ante contract mitigates the seller s ex post rent seeking vis a vis the contracted buyer accordingly it may create more social welfare than the absence of ex ante contracts depending upon the contracted buyer s financial constraint and the distributions of trade surplus implementation of the optimal strategic ex ante contract and policy implications are discussed

the economic efficiency of backward vertical integration in the international petroleum refining industry a benefit of backward vertical integration in the petroleum refining industry is reduced uncertainly in the supply of crude oil for refining however there is no a priori reason to believe that refiners are more skilful in managing combined refining and crude oil production operations than are specialists in these functions using the concept of frontier production functions efficiency differences between firms with differing degrees of backward vertical integration are estimated backward vertical integration improves scale efficieny and reduces business risk significantly but it reduces both technical and overall economic efficiency this is the first comprehensive empirical test of the efficiency of vertical integration in the literature

eliminating the market for secondhand goods an alternative explanation for leasing there are a number of prominent specific instances in which a durable goods manufacturer with significant market power employed a lease only policy i united shoe in the market for shoe machinery ii ibm in the market for computers and iii xerox in the market for copiers the obvious question that arises is why would such a firm prefer leasing over selling in this article i argue that one role of the lease only policy was to eliminate the market for secondhand goods the article formally demonstrates the argument discusses the relationship between this article and earlier literature on secondhand markets and discusses the implications for antitrust policy

exclusive contracts and market dominance we propose a new theory of exclusive dealing the theory is based on the assumption that a dominant firm has a competitive advantage over its rivals and that the buyers willingness to pay for the product is private information in this setting the dominant firm can impose contractual restrictions on buyers without necessarily compensating them implying that exclusive dealing contracts can be both profitable and anticompetitive we discuss the general implications of the theory for competition policy and illustrate by examples its applicability to antitrust cases jel d21 d43 d82 d86 k21 l13 l40