Retail Competition Percolating Through to Suppliers and the Use of Vertical Integration, Tying, and Vertical Restraints To Stop It

Abstract

Conventional wisdom presumes that a supplier in a monopolistic market, or in an oligopolistic market that is not perfectly competitive, has the power to charge a supra-competitive wholesale price. In contrast, this Article, elaborating on recent economic studies, shows that the supplier of an intermediate product may not be able to charge a supra-competitive wholesale price. The reason is that the supplier has an incentive to grant a marginal price concession to one buyer, at the expense of competing buyers, in exchange for a fixed payment. The statutory ban on secondary line price discrimination helps the supplier commit to charging a supracompetitive wholesale price. This Article, however, exposes how buyer liability under this statutory ban erodes the effectiveness of the statute and fuels the supplier's urge to make concessions. The Article further demonstrates how vertical integration, tying and vertical restraints (particularly imposing minimum or maximum resale prices, selling to a sole buyer, designating exclusive territories to buyers, and using most favored- customer clauses) can be used to remove the supplier's incentive to grant such concessions and thus restore the supplier's market power. The result is an anticompetitive explanation for vertical integration and vertical restraints that legal commentators, courts, and agencies have neglected. The Article also reveals an anticompetitive explanation for tying that the economics and legal literature and the case law have failed to identify. Moreover, the Article fills gaps in the current economics literature on maximum resale price maintenance by showing how imposition of maximum resale prices is anticompetitive even when it does not completely eliminate buyers' profits from sales. The Article additionally demonstrates how the supplier's incentive to grant concessions renders the "double marginalization " and "input substitution" efficiencies of vertical integration less important than conventionally thought. More antitrust concerns are raised when the supplier is contractually bound to enforce minimum resale prices or exclusive dealerships. Even if these restraints do not bind the supplier to enforce them, this Article, in contrast to recent economics literature, reveals that these restraints are anticompetitive, as they aid the supplier in developing a reputation for not making concessions.