Question

Suppose a monopolistic upstream firm sells to a monopoly downstream firm. If vertical integration is impractical, what might the upstream firm do to reduce the distortions from the double monopoly markup?

Answer 1

A firm that sells to finalconsumers controls most of the variables that impact the demand (price, quality...), which is not the case of firms selling to other firms.

• A cement producer sells its cement to construction firms.
• A TV manufacturer sells its products to retailers etc.

which in turn sell their products to final consumers(or to other firms). Lots of the bebefits from a vertical integration can be achieved by long-term contract between firms:

• Joint ventures
• Outsourcing
• Franchise
• Exclusivity.

Upstream firm could prefer these alternatives:-

• Costs to manage employees of the distribution channel.
• Distant geographical maket for the producer and the distributor.

The producer can also set a maximum resale price. Without vertical integration, can we fix this " horizontal externality" problem between retailers (problem of incentives to commercial effort)?

The upstream firm should take some measures to reduce compettion in the downstream market that is exclusive territories and resale price maintenance.

When manufacturing and distribution are undertaken by 2 successive monopolies, each firm, in its attempt tp maximize its own profits, charges a price that contains a monopoly markup over its own marginal cost. This gives rise to the problem of double monopoly markup (also known as double marginalization).

On the way of avoiding the losses due to double marginalization is by integrating the two firms vertically and thus reducing at least one of the dead weight losses.This can be done through merger and acquition of one of the firm by the other firm in the supply chain.PPA mechanisms induce firms to distort the prices of their goods(usually updward) relative to prices that would maximize profits in settings where advertising is sold under pay-per exposure methods. Upward price distortions reduce both consumer surplus and the joint publisher -advertiser profit, leading to a net reduction in social welfare.

Analysis of vertical restraints in terms of public policy is complex due to the fact that same clauses can both have positive and negative effectsof efficiency. There are significant variations in public policy over time and between different jurisdictions:

IN THE UNITED STATES:

1) In 1967, the supreme court declares that vertical restraints is unlawful perse

2) In 1977, she rules that non-tariff vertical restraints must be judges under the rule of reason.

3) Since then, the rules tend to be softened. For instance, 1997, maximum price maintenance is judged legal.

IN EUROPE:

1) The article 85(1) forbids vertical restraints.

2) However, the article 85(3)grants certain exemptions when it is justified by a valid technical or economic reasonds or if consumers receives a fair part of the benefice.

3)IN 1967, EXMPTION for exclusive territories and exclusive distribution.

4) RPM is illigal but "suggested" minimum and maximum price are accpeted

Vertical integration is when a company controls more than one stage of the supply chain. That's the process businesses use to turn raw material into a product and get it to the consumer. A company vertically integrates its controls in two or more of these stages.There are two : (1) Forward integration is when a company at the beginning of the supply chain controls stages farther along. Examples include iron mining companies that own "downstream' activities such as steel factories. (2) Backward intergration is when a business at the end of the supply chain takes on activities "upstream". An example is when a movie distributor, such as netflix also manufactures content.