The Economics of Vertical Restraints

Most relationships between producers and distributors consist of sophisticated contracts using more than the simple linear pricing rules that are the heart of most microeconomic textbooks. Instead, they are often governed by contractual provisions, referred to as vertical restraints, that not only set more general terms for payments (non-linear prices two-part tariffs, quantity discounts -, royalties, slotting allowances), but also include terms limiting one party’s decisions (resale price maintenance, quantity fixing, tie-ins) or softening competition (exclusive dealing, franchising, exclusive territories). The motivations for vertical restraints and their impact on economic welfare have been actively debated by academics. Some believe that vertical agreements are very different from agreements between competing firms and appear only when they help improving the efficiency of the vertical structure. Competition agencies should therefore let firms design ∗This paper has been prepared for the conference on “Advances of the Economics of Competition Law” in Rome (June 2005).

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