Neutrality in Distribution: An Economic Perspective on Competition
Explore the economic scenarios and profit-maximizing strategies related to neutrality in distribution, as analyzed from an economic perspective. The content delves into intra-brand competition and consumer preferences across various distribution channels.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
You are allowed to download the files provided on this website for personal or commercial use, subject to the condition that they are used lawfully. All files are the property of their respective owners.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author.
E N D
Presentation Transcript
Chillin' Competition 2016 Is Neutrality in Distribution Reasonable? An Economic Perspective 21 November 2016 21 November 2016 Jorge Padilla
CONTENTS 1 The Economic Scenario 2 2 Profit Maximising Distribution 6 3 The Per Se World 10 4 First Best 13 5 Second Best 17 6 Third Best 23 7 In Conclusion 27 1 COMPASS LEXECON
The Economic Scenario 2 COMPASS LEXECON |
THE ECONOMIC SCENARIO ? Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 3 COMPASS LEXECON
THE ECONOMIC SCENARIO ????,??,?? + ????,??,?? = ? ??,??,?? ? ????,??,? = ????,??,? = ? Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 4 COMPASS LEXECON
THE ECONOMIC SCENARIO Neutrality in preferences: consumers are indifferent across distribution channels ? Upstream firm ???,?,?? = ?(?,??) ? ??> ?? ?? ?? ????,??,?? = ? ????,??,?? = ?(??,??)??< ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 5 COMPASS LEXECON
Profit Maximising Distribution 6 COMPASS LEXECON |
INTRA-BRAND COMPETITION Profit maximising company sets wholesale prices for B&M and online distributors B&M distributor selects the end-price and the level of effort that maximises its profits, taking as given the wholesale prices set by the vertically integrated firm Online distributor selects the end-price that maximises its profits, taking as given the wholesale prices set by the vertically integrated firm ? Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 7 COMPASS LEXECON
INTRA-BRAND COMPETITION ? ??= ??? ?? ???? ?(??) Upstream firm ?(??) = (?? ??)?? ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 8 COMPASS LEXECON
INTRA-BRAND COMPETITION Non-neutrality in distribution since B&M distributor s effort is indispensable Low ?? Upstream firm wants to limit the ability of online distributor to undercut B&M distributor; High ?? Possible need to foreclose online distribution High ?? ? Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 9 COMPASS LEXECON
The Per Se World 10 COMPASS LEXECON |
THE PER SE WORLD ? Neutrality in distribution Upstream firm ??= ?? No restrictions of intra-brand competition ?? ?? ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 11 COMPASS LEXECON
INTRA-BRAND COMPETITION Non-neutrality in distribution since B&M distributor s effort is indispensable Low ?? Upstream firm wants to limit the ability of online distributor to undercut B&M distributor; High ?? Possible need to foreclose online distribution High ?? ? Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 12 COMPASS LEXECON
First Best 13 COMPASS LEXECON |
FIRST BEST ? Social planner maximises total welfare It sets wholesale and final prices and it also determines the level of effort of the B&M distributor The social planner needs to respect the participation constraints of the upstream firm and the B&M and online distributors Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 14 COMPASS LEXECON
FIRST BEST (CONT.) ??= ??= ? ? ??= ? ? Upstream firm ??= ? ?(??) ?? ?? ? ?? = ? ?? + ? B&M distributor Online distributor ??= ??? ??+ ??(? ?) ?(??) ?? ?? ? ? ??+ ?? = ? ????+ ??? ??(??,??,??) + ??(??,??,??) 15 COMPASS LEXECON
FIRST BEST (CONT.) ? Non-neutrality in distribution Upstream firm ? ?? > ? ??= ? ? ?? < ? ? = ?? ?? ?? Consumers pay the same price across distribution channels B&M distributor Online distributor ??= ??= ? ?? ?? ??(??,??,??) + ??(??,??,??) 16 COMPASS LEXECON
Second Best 17 COMPASS LEXECON |
SECOND BEST ? Social planner sets wholesale and final prices to maximise social welfare Upstream firm B&M distributor selects the level of effort that maximises its well-being, taking as given the prices set by the social planner ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 18 COMPASS LEXECON
SECOND BEST (CONT.) ??= ??= ? ? ??= ? ? Upstream firm ??= ? ?(??+ ??) ? ??+ ?? ??= ??? ?(??+ ??) ?(??) ?? ?? B&M distributor Online distributor ??= ??? ??+ ??(? ?) ?(??) ?? ?? ? ? ??+ ?? = ?(??+ ??) + ??? ??(??,??,??) + ??(??,??,??) Incentive Compatibility 19 COMPASS LEXECON
SECOND BEST (CONT.) ??= ??= ? ??= ? < ?? ? ??= ? ? Upstream firm ??= ? ?(??+ ??) ? ??+ ?? ??= ??? ?(??+ ??) ?(??) ?? ?? B&M distributor Online distributor ??= ??? ??+ ??(? ?) ?(??) ?? ? ? ??+ ?? = ?(??+ ??) + ??? ?? ??(??,??,??) + ??(??,??,??) 20 COMPASS LEXECON
SECOND BEST VERSUS FIRST BEST Informational rents ? ? ??+ ?? > ?(??) Upstream firm Possible foreclosure of online distribution Higher prices Lower output Lower consumer welfare Lower total welfare ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 21 COMPASS LEXECON
SECOND BEST (CONT.) ? Non-neutrality in distribution Upstream firm ? ??,?? > ? ??= ?? ? ??,?? < ?? ? = ?? ?? ?? Consumers pay the same price across distribution channels or online is foreclosed B&M distributor Online distributor ??= ? ?? ?? ?? ??(??,??,??) + ??(??,??,??) 22 COMPASS LEXECON
Third Best 23 COMPASS LEXECON |
VERTICAL INTEGRATION ? Profit maximising company sets compensation levels for B&M and online agents B&M distributor (agent) selects the level of effort that maximises its well- being, taking as given the prices set by the vertically integrated firm Upstream firm ?? ?? B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 24 COMPASS LEXECON
VERTICAL INTEGRATION ??= ? ?? ? ??= ?? ? Upstream firm ??= ? ?(??+ ??) ? ??+ ?? ??= ??? ?(??+ ??) ?(??) ?? ?? B&M distributor Online distributor ? ? ??+ ?? ? ??+ ?? ??? ?,?? = ??? ?? ?? ??(??,??,??) + ??(??,??,??) Profit maximization 25 COMPASS LEXECON
VERTICAL INTEGRATION VERSUS SECOND BEST Higher prices Lower output Lower consumer welfare Lower total welfare ? Upstream firm ?? ?? But, as in first and second best, non-neutrality in distribution Vertical price restraints And, as in second best, possible foreclosure of online distribution B&M distributor Online distributor ?? ?? ??(??,??,??) + ??(??,??,??) 26 COMPASS LEXECON
In Conclusion The Per Se World Needs to Reconsider its Vertical Restraints Policy because it is not a First Best, nor a Second Best, not even a Third Best World!!! 27 COMPASS LEXECON |
THANK YOU! jpadilla@compasslexecon.com jpadilla@compasslexecon.com jpadilla@compasslexecon.com View my research on my SSRN author page: http://ssrn.com/author=47132 28 COMPASS LEXECON
