RPM and Vertical Integration with Upstream Competition and Noncontractible Efforts

40 Pages Posted: 13 Aug 2024

See all articles by Michele Bisceglia

Michele Bisceglia

University of Bergamo - Department of Management, Economics and Quantitative Methods; University of Toulouse 1 - Toulouse School of Economics (TSE)

Mark A. Israel

Compass Lexecon

Salvatore Piccolo

Compass Lexecon

Paolo Ramezzana

affiliation not provided to SSRN

Date Written: August 01, 2024

Abstract

Models of vertical contracting often find that non-linear pricing schedules such as two-part tariffs constitute a perfect substitute for resale price maintenance (RPM) or vertical integration. Yet, RPM and vertical integration are ubiquitous in practice. In this paper, we explain the incremental value of strategies like RPM and vertical integration, and thus rationalize firms' vertical restraints and integration strategies, without either resorting to ad-hoc restrictions on the contract space or considering downstream competition. We do so by building a common agency model where two differentiated manufacturers compete for representation at a single retailer and, critically, where there is double moral hazard, meaning that noncontractible efforts at both levels of the supply chain can boost demand for the final products. In this setting, we find that RPM and vertical integration have incremental effects even when firms can use two-part tariffs. We show that, absent vertical integration, RPM is a strict best response for each manufacturer, and that it increases consumer welfare. But by intensifying competition, RPM may reduce manufacturers' profits. With regard to vertical integration between one of the manufacturers and the retailer, we show that it is always profitable, and it increases consumer surplus as long as non-contractible effort is reasonably important or product differentiation is either high or low. Furthermore, vertical integration can increase the profit of the unintegrated manufacturer.

Keywords: Vertical Integration, Resale Price Maintenance, Noncontractible Effort, Double Moral Hazard, Common Agency

JEL Classification: L42, L50, L81

Suggested Citation

Bisceglia, Michele and Bisceglia, Michele and Israel, Mark A. and Piccolo, Salvatore and Ramezzana, Paolo, RPM and Vertical Integration with Upstream Competition and Noncontractible Efforts (August 01, 2024). Available at SSRN: https://ssrn.com/abstract=4913199

Michele Bisceglia (Contact Author)

University of Bergamo - Department of Management, Economics and Quantitative Methods ( email )

Salvecchio 19
Bergamo, 24129
Italy

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Mark A. Israel

Compass Lexecon ( email )

United States

Salvatore Piccolo

Compass Lexecon ( email )

Italy

Paolo Ramezzana

affiliation not provided to SSRN

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