Vertical Agreements

1. Antitrust Law Vertical Agreements Mark R. Patterson Fordham University School of Law

2. Which Would You Prefer? SUPPLIER A SUPPLIER A SUPPLIERS competing goods at wholesale $10 $10 YOU YOU DEALERS MINIMUM PRICE SET BY SUPPLIER PRICE SET BY YOU competing goods at retail CONSUMERS CONSUMERS

3. Which Would You Prefer? SUPPLIER A SUPPLIER A $10 $10 YOU OTHER DEALERS YOU OTHER DEALERS PRICE SET BY YOU PRICES SET BY OTHER DEALERS MINIMUM PRICE SET BY SUPPLIER CONSUMERS CONSUMERS CONSUMERS CONSUMERS

4. The Free-Riding Problem Can you compete on services in these circumstances? SUPPLIER A $10 not if other dealers set prices too low, because in that case consumers could receive services from you and then pay lower prices at other dealers, which would then be free-riding YOU OTHER DEALERS PRICES SET BY OTHER DEALERS PRICE SET BY YOU CONSUMERS CONSUMERS

5. When Will a Supplier Prefer Competition on Services? Suppose that a dealer’s basic costs, without additional promotion or services, are $2 per unit sold. SUPPLIER A SUPPLIER B When will supplier A prefer that its dealers compete on promotion and service? $10 $10 when consumers believe the dealer’s additional promotion and services are worth at least $4 YOU OTHER DEALERS $16 MINIMUM PRICE SET BY SUPPLIER A or when consumers, as a result of the additional promotion and services, value the product of supplier A at least $4 more than that of supplier B $12 $12 CONSUMERS CONSUMERS

6. When Will Consumers Prefer Competition on Services? Suppose that a dealer’s basic costs, without extra promotion or services, are $2 per unit sold. SUPPLIER A SUPPLIER B $10 $10 When will consumers be better off with minimum RPM? when for less than $4 the dealer provides promotion and service worth at least $4? YOU OTHER DEALERS GOOD $16 MINIMUM PRICE SET BY SUPPLIER A or when for less than $4 the dealer convinces consumers that the product of supplier A is worth at least $4 more than that of product B? $12 $12 MAYBE BAD CONSUMERS CONSUMERS