On the effects of antitrust policy intervention in pricing strategies in a distribution channel

Abstract

AbstractIn this article, we examine the economic and welfare ramifications of antitrust policy intervention in primary‐ and secondary‐line price discrimination in a distribution channel where downstream retailers are vertically related through a strategic upstream manufacturer. Particularly, we focus on a distribution channel where a manufacturer sells his product through retailers in two asymmetric markets. The markets are asymmetric along two dimensions: One exhibits a higher demand/profit potential than does the other; and one is a competitive market where two retailers engage in imperfect price competition, whereas the other is a captive market monopolized by one of the retailers. We characterize the effect of antitrust policy intervention in each form of third‐degree price discrimination on the pricing and selling mechanisms of channel members, consumers, and the channel profits (and hence on the total welfare) for varying degrees of asymmetry on demand potential between the two markets and the extent of product substitutability. We show that under practical demand and competition conditions, contrary to prior literature, antitrust policy intervention in secondary‐line discrimination always benefits the local retailer (the disfavored customer of the manufacturer) and yet is apt to result in a lose–win or lose–lose outcome in addition to a win–win outcome for the channel and society. Second, antitrust policy intervention in primary‐line discrimination so as to protect a localized retailer from the selective price cuts of a chain‐store retailer (rather than to protect competition) can actually result in a win–win outcome. Third, in the absence of antitrust policy intervention, consumers are always harmed by (discriminatory) pricing practices employed in a channel. Those and other findings contribute to the intense debate over the merits and goals of antitrust policy intervention in third‐degree price discrimination in distribution channels by shedding some light on the contractual relationships between manufacturers and retailers and economic forces at play.