TITLE:
Profit-Improving Linear Tariffs Pricing in a Vertical Oligopoly
AUTHORS:
Dong Joon Lee, Sangheon Han, Yuji Ono, Shigetsune Yamoto
KEYWORDS:
Linear Tariffs Pricing, Two-Part Tariffs Pricing, Double Marginalization, Competition
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.11,
August
2,
2018
ABSTRACT: Considering the interplay between intra-firms (own
retailing firms) and inter-firms (rival retailing firms) competition in
vertically related markets, we compare linear tariffs and two-part tariffs
pricing. In contrast to previous results, we show that when both products are
sufficiently close substitutes, there is a threshold level of the number of
retailing firms, beyond which each manufacturing firm’s profits are larger under linear tariffs pricing
than under two-part tariffs pricing. It shows the contradictions to the
conventional wisdom that two-part tariffs pricing is always better than linear
tariffs pricing from the viewpoint of manufacturing firms. We also show that
the wholesale prices increase as the number of retailing firms increases under
two-part tariffs pricing, regardless of the degree of product substitutability.