Vertical Control and Price Versus Nonprice Competition

This paper considers a manufacturer distributing a product through retailers who compete in price and service, which reduces the time it takes to purchase a good. The mix of these instruments that maximizes collective profit is determined by the tastes of consumers on the “product margin,” whereas decentralized retailers consider as well the tastes of consumers on the interretailer margins. Given search or travel costs, consumers with low time costs are overrepresented on the interretailer margins. In considering customers on the wrong margin, retailers are therefore biased toward price competition. This distortion that can be corrected with vertical restraints.