Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Vertical restraints are means(often contractual)by which firms attempt to achieve the same results as they might achieve through vertical integration.,Because the economics of vertical integration shows that there are seldom efficiency or welfare losses from mergers,we expect the same of vertical restraints.,Why vertical restraints instead of integration?,Firms may fear legal prosecution of vertical mergers,Firm may not have resources or desire to deal with mergers,Why do non-integrated firms freely enter into contracts limiting their own behavior(they agree to v.restraints)?,Downstream firms get the opportunity of buy inputs from upstream,Upstream firms get the opportunity to sell outputs,Vertical Restraints 2,Nonlinear pricing is usually legal,Output royalty:Upstream monopolist sells input at competitive price to get downstream users to use a lot of it.The monopolist makes a profit by charging a royalty on each unit of OUTPUT produced with the input.,Franchise fee:Again price input competitively but make profit by charging a fixed fee,Vertical Restraints 3,Vertical restraints,Maximum resale price allows upstream producer to limit downstream distributors ability to use monopoly power(upstream producer sells more to distributor because distributor sells more),Resale price maintenance may be used to prevent distributors who do not provide costly,demand expanding services from free-riding on those that do,Exclusive dealing also protects a producers investment in demand increasing marketing so that distributors cannot sell cheaper unadvertised brands after the customer is in the store,Tying contracts are used by upstream input producers to adjust input prices to get efficient downstream production and extract downstream profits,Quantity forcing is a way to eliminate downstream monopoly profits,Vertical Restraints 4,Some vertical restraints are or have been illegal(resale price maintenance,maximum resale price,exclusive trerritories,tying contracts).,Some vertical restraints are dealt with under a rule of reason approach(exclusive dealing),Some vertical restraints are usually legal(quantity forcing),