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Vertical Price Controls with Uncertain Demand

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  • Butz, David A

Abstract

A manufacturer distributes output before knowing demand and thus risks making more than its rivalrous independent retailers can sell at the monopoly price. If demand is low, retailers may therefore resell more than the joint profit-maximizing output. Anticipating this, they will not pay as much for the merchandise ex ante as they would if the manufacturer could commit to preventing rivalry. The manufacturer has many options, including vertical integration, chain outlets, restricted output, buy backs, just-in-time deliveries, and minimum resale prices. The article discusses each option's advantages and disadvantages and concludes that all roads lead to resale price maintenance. The article closes with an alternative to the dealer cartel hypothesis for minimum resale prices. Copyright 1997 by the University of Chicago.

Suggested Citation

  • Butz, David A, 1997. "Vertical Price Controls with Uncertain Demand," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 433-459, October.
    • Handle: RePEc:ucp:jlawec:v:40:y:1997:i:2:p:433-59
    DOI: 10.1086/467379
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    Cited by:

    1. Xiang Fang & Jun Ru & Yunzeng Wang, 2021. "The Effect of List Price on Channel Performance with Consignment," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 235-252, January.
    2. de Matta, Renato E. & Lowe, Timothy J. & Zhang, Dengfeng, 2014. "Consignment or wholesale: Retailer and supplier preferences and incentives for compromise," Omega, Elsevier, vol. 49(C), pages 93-106.
    3. Rakesh Niraj & Chakravarthi Narasimhan, 2017. "Examining Incentives to Share Demand Information with your Channel Partner," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 961-980, July.
    4. Charles E. Hyde, 2001. "What Motivates Returns Policies?," Department of Economics - Working Papers Series 821, The University of Melbourne.
    5. Harish Krishnan & Roman Kapuscinski & David A. Butz, 2004. "Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort," Management Science, INFORMS, vol. 50(1), pages 48-63, January.
    6. Birendra K. Mishra & Srinivasan Raghunathan, 2004. "Retailer- vs. Vendor-Managed Inventory and Brand Competition," Management Science, INFORMS, vol. 50(4), pages 445-457, April.
    7. 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.
    8. D Flath & T Nariu*, 2000. "Demand Uncertainty And Resale Price Maintenance," Contemporary Economic Policy, Western Economic Association International, vol. 18(4), pages 397-403, October.
    9. João Montez, 2015. "Controlling opportunism in vertical contracting when production precedes sales," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 650-670, September.
    10. Harish Krishnan & Ralph A. Winter, 2010. "Inventory Dynamics and Supply Chain Coordination," Management Science, INFORMS, vol. 56(1), pages 141-147, January.
    11. 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.
    12. Xiaoning Luo & Yanmin Jiang & Qiying Hu, 2010. "Supply chain coordination with shelf‐space and retail price dependent demand and heterogeneous retailers," Naval Research Logistics (NRL), John Wiley & Sons, vol. 57(8), pages 673-685, December.
    13. W. Erno Kuiper & Matthew T.G. Meulenberg, 2002. "Vertical price leadership: A cointegration analysis," Agribusiness, John Wiley & Sons, Ltd., vol. 18(3), pages 317-331.
    14. Shailender Singh & Chen Guan-Ru, 2020. "Modeling variations in price inertia under demand uncertainty," Journal of Revenue and Pricing Management, Palgrave Macmillan, vol. 19(1), pages 26-42, February.
    15. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    16. V. Padmanabhan & I. P. L. Png, 2004. "Reply to “Do Returns Policies Intensify Retail Competition?”," Marketing Science, INFORMS, vol. 23(4), pages 614-618, January.
    17. Subhajyoti Bandyopadhyay & Anand A. Paul, 2010. "Equilibrium Returns Policies in the Presence of Supplier Competition," Marketing Science, INFORMS, vol. 29(5), pages 846-857, 09-10.
    18. Hao Wang, 2001. "Resale Price Maintenance in an Oligopoly with Uncertain Demand," Working Papers 01-11, Ohio State University, Department of Economics.
    19. Ingene, Charles A. & Parry, Mark E. & Xu, Zibin, 2020. "Resale Price Maintenance: Customer Service Without Free Riding," Journal of Retailing, Elsevier, vol. 96(4), pages 563-577.

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