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Profit-Maximising Rigid Prices and Vertical Integration

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  • Nigel Wadeson

Abstract

This article explores profit-maximising rigid pricing for a price-setting firm and relates the results to vertical integration, which is an important area of corporate strategy and antitrust policy. The setting of a profit-maximising rigid price is investigated in the face of a known distribution of short-run demand levels as a compromise between the flexible prices that would be appropriate in the short run at different levels of demand. The price and level of capacity are therefore set to maximise expected profits across varying levels of demand. With the help of computer simulations, it is shown that price rigidity increases the incentives for vertical integration, particularly where upstream production is capital intensive, due to the increased importance of rationing. The incentives will also be particularly strong for more efficient and more capital-intensive downstream production with low short-run marginal costs.

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  • Nigel Wadeson, 2017. "Profit-Maximising Rigid Prices and Vertical Integration," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 24(1), pages 53-72, January.
    • Handle: RePEc:taf:ijecbs:v:24:y:2017:i:1:p:53-72
    DOI: 10.1080/13571516.2016.1199457
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    References listed on IDEAS

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    1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    2. Warren-Boulton, Frederick R, 1974. "Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 783-802, July/Aug..
    3. Carlton, Dennis W, 1979. "Vertical Integration in Competitive Markets under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 27(3), pages 189-209, March.
    4. Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-248, November.
    5. Hendrikse, George & Peters, Hans, 1989. "A note on partial vertical integration," Economics Letters, Elsevier, vol. 30(3), pages 249-252, September.
    6. MacDonald, James M, 1985. "Market Exchange or Vertical Integration: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 327-331, May.
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    Cited by:

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