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Vertical Price Restraints and Free Entry Under Asymmetric Information *
Author(s) -
Bonazzi Leda Maria,
Fiocco Raffaele,
Piccolo Salvatore
Publication year - 2021
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12272
Subject(s) - free entry , resale price maintenance , economic surplus , upstream (networking) , downstream (manufacturing) , welfare , vertical restraints , information asymmetry , microeconomics , barriers to entry , economics , hierarchy , business , industrial organization , incentive , market structure , market economy , operations management , computer network , computer science
In a vertically related market where the number of manufacturer‐retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free‐entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez‐faire and ban on resale price maintenance (RPM) under different entry decision modes. Under upstream entry, laissez‐faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, under downstream entry, a ban on RPM stimulates entry and consumer surplus, but laissez‐faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.