DP6248 Two Tales on Resale

Author(s): Felix Höeffler, Klaus M. Schmidt
Publication Date: April 2007
Keyword(s): non-spatial product differentiation, resale regulation, spatial product differentiation, vertical restraints, wholesale
JEL(s): D43, L11, L42, L51
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6248

In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard 'retail minus X regulation' may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.