The Theory of Price Collars: The Linking of Prices in a Market Channel to Redress the Exercise of Market Power

Abstract

The marketing channels for many goods involve the production of a raw commodity that is processed and then distributed to retailers for sale to consumers. Either the processing industry or the retailing industry or both may exercise substantial market powe r ultimately against raw commodity suppliers or consumer s, the disorganized (competitive) economic groups at the ends of the market channel. This paper develops a theory of price collars to regulate pricing in such a channel. Price collars link raw product, wholesale and retail prices but do not explicitly set such prices. For example, a wholesale price collar could limit the wholesale price to 140% of the raw commodity price, and a retail price collar could limit retail price to 130% of the wholesale price.