Does a Supplier Have the Market Power We Thought it Had? The Use of Vertical Integration and Vertical Restraints to Restore the Supplier's Market Power

Conventional wisdom presumes that a supplier in a monopolistic market, or in an oligopolistic market that is not perfectly competitive, has the power to charge a supra competitive wholesale price. In contrast, recent economic studies show that the supplier of an intermediate product may not be able to charge a supra competitive wholesale price. This is because the supplier will have an incentive to grant a marginal price concession to one buyer (in exchange for a fixed payment from this buyer) at the expense of competing buyers. The Article demonstrates how vertical integration and vertical restraints can be used to remove the supplier's incentive to grant such concessions, and thus restore the supplier's market power. This reveals an anticompetitive explanation for vertical integration and vertical restraints that has been neglected by legal commentators and decision-makers. Furthermore, the Article exposes more subtle legal implications of the supplier’s incentive to grant concessions: vertical merger is more anticompetitive than vertical internal expansion; the “double marginalization” and “input substitution efficiencies” of vertical integration are less important than conventionally thought; when the supplier is contractually bound to enforce vertical restraints, they should raise more antitrust concern; and, in contrast to the case law’s rule, minimum resale price maintenance is less anticompetitive than exclusive territories. JEL Class K21, L42, L13 * Assistant Professor, College of Management Academic Studies School of Law, Israel; SJD and Former John M. Olin Research Fellow in Law and Economics, Harvard Law School. Does a Supplier Have the Market Power We Thought it Had? The use of vertical integration and vertical restraints to restore the supplier’s market power * David Gilo © 1999 David Gilo. All rights reserved.