Chapter 13 - Vertical Relations

Question 1

vertical relations

Answer 1

relations between two firms in sequence along the value chain

Question 2

upstream stage of the production

Answer 2

involves searching for and extracting raw materials

Question 3

downstream stage of the production

Answer 3

involves processing the materials into a finished product and selling it

Question 4

double marginalisation

Answer 4

two independent firms price at a mark-up over marginal cost, yielding deadweight losses
DWL are being incurred twice!
If upstream and downstream merge, then upstream ceases to try to capture surplus from downstream. Upstream prices (transfers) at MC. DWL only from one firm

Question 5

If a manufacturer sets a wholesale price to a vertically separated retailer, then their joint profits are lower, and retail price is higher, than under vertical integration

Answer 5

Question 6

competition softening effect

Answer 6

vertical integration has a competition softening effect that tends to push price up

Question 7

conflicting effects of vertical integration from a consumers point of view

Answer 7

getting rid of double marginalisation is good, but softening downstream competition is bad

Question 8

hold-up problem

Answer 8

the hold-up problem is a situation where to parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power, and thereby reduce their own profits
when investment in specific assets are at stake, vertical integration alleviates the hold-up problem but increases the agency problem.

Question 9

if nonlinear contracts are possible, then the optimal solution under vertical separation is identical to that under vertical integration

Answer 9

allowing for fixed fees, the upstream profit maximisation problem is essentially equivalent to maximising joint profits of the upstream and the downstream firms, and then finding the maximum fee that the downstream firm is willing to pay.

Question 10

slotting allowances

Answer 10

fees paid by manufacturers to obtain retailer patronage (e.g., getting shelf space in a supermarket)

Question 11

resale price maintenance

Answer 11

the practice whereby the manufacturer imposes a minimum price on retailers in order to correct externalities

Question 12

exlusive territories

Answer 12

vertical restraint whereby each retailer is assigned a given territory that other retailers have no access to

Question 13

exclusive dealing

Answer 13

retailer cannot work but with one manufacturer

Question 14

vertical restraints such as resale price maintenance, exclusive territories, and exclusive dealing allow upstream and downstream firms to internalise the effects of demand-increasing investments