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Price-dependent profit-sharing as a channel coordination device

Foros, Øystein; Hagen, Kåre Petter; Kind, Hans Jarle
Working paper
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dp2009-9.pdf (313.2Kb)
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http://hdl.handle.net/11250/163242
Utgivelsesdato
2009-07
Metadata
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  • Discussion papers (SAM) [607]
Sammendrag
We show how an upstream firm by using a price-dependent profit-sharing rule can prevent destructive competition between downstream firms that produce relatively close substitutes. With this rule the upstream firm induces the retailers to behave as if demand has become less price elastic. As a result, competing

downstream firms will maximize aggregate total channel profit. When downstream

firms are better informed about demand conditions than the upstream firm, the

same outcome cannot be achieved by vertical restraints such as resale price maintenance (RPM). Price-dependent profit-sharing may also ensure that the downstream

firms undertake efficient market expanding investments. The model is consistent

with observations from the market for content commodities distributed by mobile

networks.
Utgiver
Norwegian School of Economics and Business Administration. Department of Economics
Serie
Discussion paper
2009:9

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