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The Effects of Price Restrictions on Competition Between National and Local Firms

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  • Patrick J. DeGraba

Abstract

I present a game-theoretic model of competition between a national firm and local firms in which the introduction of most-favored-customer clauses into the sales contracts of the national firm decreases all industry prices. The reason is that the price restriction makes the national firm a weak price competitor in each local market. This produces a prisoners' dilemma situation in which each local firm has the unilateral incentive to be more aggressive in nonprice decisions. This increase in nonprice competition by all local firms causes prices to fall across the industry.

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  • Patrick J. DeGraba, 1987. "The Effects of Price Restrictions on Competition Between National and Local Firms," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 333-347, Autumn.
    • Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:333-347
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    Citations

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    Cited by:

    1. Kazuhiro Ohnishi, 2010. "Most-Favoured-Customer Pricing and Labour-Managed Oligopoly," Journal of Industry, Competition and Trade, Springer, vol. 10(1), pages 33-40, March.
    2. Bourguignon, Helene & Ferrando, Jorge, 2007. "Skimming the other's cream: Competitive effects of an asymmetric universal service obligation," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 761-790, August.
    3. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
    4. Patrick DeGraba, 1996. "Most‐Favored‐Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 565-579, December.
    5. Chih-Jen Wang & Ying-Ju Chen & Chi-Cheng Wu, 2011. "Advertising competition and industry channel structure," Marketing Letters, Springer, vol. 22(1), pages 79-99, March.
    6. Roman Inderst & Tommaso Valletti, 2009. "Price discrimination in input markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 1-19, March.
    7. Walter Garcia Fontes & Massimo Motta, 1994. "Quality of professional services under price floors," Economics Working Papers 87, Department of Economics and Business, Universitat Pompeu Fabra.
    8. Dobson, Paul W & Waterson, Michael, 2003. "Chain-Store Pricing For Strategic Accommodation," The Warwick Economics Research Paper Series (TWERPS) 677, University of Warwick, Department of Economics.
    9. Sandro Shelegia, 2012. "Is the Competitor of my Competitor also my Competitor?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(4), pages 927-963, December.
    10. Amarjyoti Mahanta, 2016. "Contemporaneous Most-Favoured-Customer Pricing Policy vs. Price Discrimination in a Differentiated Product Duopoly Market," Economics Bulletin, AccessEcon, vol. 36(1), pages 75-83.
    11. Ralph Braid, 2013. "The locations of firms on intersecting roadways," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(3), pages 791-808, June.
    12. Aguirre Pérez, Iñaki, 2011. "Multimarket Competition and Welfare Effects of Price discrimination," IKERLANAK info:eu-repo/grantAgreeme, Universidad del País Vasco - Departamento de Fundamentos del Análisis Económico I.
    13. David Sappington & Dennis Weisman, 2012. "Regulating regulators in transitionally competitive markets," Journal of Regulatory Economics, Springer, vol. 41(1), pages 19-40, February.
    14. Lu, Shenghua & Wang, Hui, 2020. "Local economic structure, regional competition and the formation of industrial land price in China: Combining evidence from process tracing with quantitative results," Land Use Policy, Elsevier, vol. 97(C).
    15. Hélène Bourguignon & Jorge Andrés Ferrando Yanez, 2003. "Skimming the Others' Cream Competitive Effects of an Asymmetric Universal Service Obligation," Working Papers 2003-43, Center for Research in Economics and Statistics.
    16. Noriaki Matsushima & Tomomichi Mizuno, 2007. "Why do large firms tend to integrate vertically? - asymmetric vertical integration reconsidered -," Discussion Papers 2007-34, Kobe University, Graduate School of Business Administration.

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