The strategic impact of voluntary vs. mandated vertical restraints and termination restrictions on exclusion of rivals
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The strategic impact of voluntary vs. mandated vertical restraints and termination restrictions on exclusion of rivals Jacob Burgdorf1 Accepted: 27 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract It has been shown that manufacturers can employ vertical practices and restraints to prevent entry in markets where upstream entrants require downstream accommodation. I show that if downstream product investment is important and encouraged by the restraint, foreclosing entry this way may not be credible. Additionally, publicly mandated vertical restraints and termination restrictions could prevent foreclosure, but if these restrictions reduce downstream product investment, they could have the opposite effect and decrease entry. Keywords Vertical restraints · Entry · Antitrust · Regulation JEL Codes L12 · L42 · L51
1 Introduction Many models explore how exclusivity in contracts may be employed to foreclose entry of rivals into markets.1 Outside of work examining the use of exclusive contracts, relatively little theoretical work examines how other vertical practices and restraints relate to entry, with Asker and Bar-Isaac (2014) being a notable exception. Additionally, public policy often puts restrictions on vertical practices by mandating conduct regarding these vertical restraints or restrictions. These mandates may come in the form of franchise termination laws (which restrict firms from terminating, altering or non-renewal 1 Aghion and Bolton (1987) is a classic example. See Rey and Tirole (2007) and Rey and Verge (2008) for summaries of this literature.
I thank Tim Bersak, Charles Thomas, and numerous seminar participants for helpful comments and suggestions.
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Jacob Burgdorf [email protected] Department of Economics, College of Business, Suite 144, University of Louisville, Louisville, KY 40292, USA
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of contracts), vertical divestiture or divorcement laws [such as in Vita (2000) and Kwoka et al. (2010)], or bans of certain vertical practices (such as banning the use of slotting fees, resale price maintenance, or exclusive territories). Alternatively, some public policies come in the form of mandates that require the use of a vertical restraint such as exclusive territories (see Sass and Saurman 1993; Lafontaine and Scott Morton 2010; Burgdorf 2019), resale price maintenance (Ornstein and Hanssens 1987), and other policies.2 The ambiguous nature of the impact of vertical practices and restraints is well known in the economic literature and was noted in the Leegin case, which overturned the per-se illegality of minimum resale price maintenance (RPM) established by the Dr. Miles case.3 The majority ruling wrote, Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive effects, depending upon the circumstances in which they are formed.4 This paper addresses some of these circumstances and presents a model that incorporates both anti- and pro-competitive uses of vertical restraints, including but n
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