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The Economic Theory of Retail Pricing: A Survey

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  • Oana Secrieru

Abstract

The types of contracts that arise in a typical vertical manufacturer–retailer relationship are more sophisticated than usually assumed in standard macroeconomic models. In addition to setting per-unit prices, manufacturers and retailers revert to non-linear pricing and non-price instruments. These instruments or contracts are referred to as vertical restraints and can take the form of franchise fees, resale-price maintenance, exclusive dealing, exclusive territories, and slotting allowances. The use and the effects of one type of instrument versus another depend crucially on specific market assumptions upstream and downstream and on the division of bargaining power between manufacturers and retailers. The author surveys the industrial organization literature on retail pricing and shows that vertical restraint instruments have important effects on producer and consumer prices, market structure, efficiency, and welfare. Some potentially important macroeconomic implications of vertical restraints are suggested.

Suggested Citation

  • Oana Secrieru, 2004. "The Economic Theory of Retail Pricing: A Survey," Staff Working Papers 04-8, Bank of Canada.
    • Handle: RePEc:bca:bocawp:04-8
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    References listed on IDEAS

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    1. B. Douglas Bernheim & Michael D. Whinston, 1998. "Exclusive Dealing," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 64-103, February.
    2. Herings, P.J.J. & Kubler, F., 1999. "The Robustness of the CAPM - A Computational Approach," Discussion Paper 1999-54, Tilburg University, Center for Economic Research.
    3. Robert Amano & Scott Hendry, 2003. "Inflation persistence and costly market share adjustment: a preliminary analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 134-146, Bank for International Settlements.
    4. Patrick Bolton & Giacomo Bonanno, 1988. "Vertical Restraints in a Model of Vertical Differentiation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 555-570.
    5. David Besanko & Martin K. Perry, 1993. "Equilibrium Incentives for Exclusive Dealing in a Differentiated Products Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 646-668, Winter.
    6. Benjamin F. Blair & Tracy R. Lewis, 1994. "Optimal Retail Contracts with Asymmetric Information and Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 284-296, Summer.
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    Cited by:

    1. Oana Secrieru, 2006. "The Economic Theory Of Vertical Restraints," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 797-822, December.

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    More about this item

    Keywords

    Market structure and pricing;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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