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Demand Uncertainty and Price Maintainance: Markdowns as Destructive Competition

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Author Info
Howard P. Marvel ()
Raymond Deneckere
James Peck

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Abstract

This paper offers a new theory of destructive competition. We compare minimum resale price maintenance (RPM) to retail market clearing in a model with a monopolistic manufacturer selling to competitive retailers. In both the RPM and Flexible-Pricing Games, retailers must order inventories before the realization of demand uncertainty. We find that manufacturer profits and equilibrium inventories are higher under RPM than under market clearing. Surprisingly, consumer surplus can also be higher, in which case unfettered retail competition can legitimately be called destructive.

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Publisher Info
Paper provided by Ohio State University, Department of Economics in its series Working Papers with number 018.

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Date of creation: Aug 1995
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Handle: RePEc:osu:osuewp:018

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  1. Edward Schlee, . "Expected Consumer's Surplus as an Approximate Welfare Measure," Working Papers 2144340, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
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  2. Hao Wang, 2005. "Retailer Heterogeneity, Intra-Brand Competition and Social Welfare," Journal of Industry, Competition and Trade, Springer, vol. 5(2), pages 87-97, June. [Downloadable!] (restricted)
  3. Canoy, Marcel & van der Ploeg, Frederick & van Ours, Jan C, 2005. "The Economics of Books," CEPR Discussion Papers 4892, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Tatsuhiko Nariu & David Flath & Atsuo Utaka, 2009. "Returns System with Rebates," ISER Discussion Paper 0744, Institute of Social and Economic Research, Osaka University. [Downloadable!]
  5. Horst Raff & Nicolas Schmitt, 2005. "Why Parallel Trade may Raise Producers Profits," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  6. Robert L. Earle & Karl Schmedders & Tymon Tatur, 2002. "Price Caps and Uncertain Demands," Discussion Papers 1340, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Perona, Mathieu, 2009. "Bookshop, blockbusters and readers’ tastes: a new appraisal of the fixed book price," MPRA Paper 17857, University Library of Munich, Germany. [Downloadable!]
  8. Diego Escobari & Li Gan, 2007. "Price Dispersion under Costly Capacity and Demand Uncertainty," NBER Working Papers 13075, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Hao Wang, 2001. "Resale Price Maintenance in an Oligopoly with Uncertain Demand," Working Papers 01-11, Ohio State University, Department of Economics. [Downloadable!]
  10. Howard Marvel, 2003. "On the Economics of Branded Open Supply," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 10(2), pages 213-223, July. [Downloadable!] (restricted)
  11. Frederick van der Ploeg, 2004. "Beyond the Dogma of the Fixed Book Price Agreement," Journal of Cultural Economics, Springer, vol. 28(1), pages 1-20, February. [Downloadable!] (restricted)
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  12. James D. Dana & Kathryn Spier, 2000. "Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms," Econometric Society World Congress 2000 Contributed Papers 1511, Econometric Society. [Downloadable!]
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