A PYMNTS Company

Vertical Practices Facilitating Exclusion

By  |  June 3, 2013

Posted by D. Daniel Sokol

John Asker, New York University – Leonard N. School of Business – Department of Economics and Heski Bar-Isaac, Rotman School of Management, University of Toronto have an excellent paper on Vertical Practices Facilitating Exclusion

ABSTRACT: Resale price maintenance (RPM), slotting fees, loyalty rebates and other related vertical practices can allow an incumbent manufacturer to transfer profits to retailers. If these retailers were to accommodate entry, upstream competition could lead to lower industry profits and the breakdown of these profit transfers. Thus, in equilibrium, retailers can internalize the effect of accommodating entry on the incumbent’s profits. Consequently, if entry requires downstream accommodation, entry can be deterred. We discuss policy implications of this aspect of vertical contracting practices.