Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

17

Vertical Price Restraints

You may never have heard of Seagate or Western Digital. Yet, chances are, you have used their products. Together, these two firms produced roughly 90 percent of the hard drives used in computers, including laptops and the computers that run the “cloud.” This means that the customers to whom Seagate and Western Digital sell are firms such as Apple, Dell, and Hewlett-Packard. In turn, these firms assemble their desktop and laptop computers and sell them to retailers including Best Buy and Staples. Apple, of course, maintains its own retail outlets as well.

Vertical chains such as that connecting the hard drive maker to the computer retailer are common. ArcelorMittal and other steel companies sell their product to auto manufacturers (among others) who, in turn, assemble finished auto products and distribute these to dealers for final retail sales. Mattel Toys sells its Barbie doll, Fisher-Price, and Hot Wheels products through retailers such as Toys ‘R’ Us and Wal-Mart. Kellogg's sells its ready-to-eat cereals through supermarkets such as Kroger and Safeway. Relations at each step require contracts. Seagate and Western Digital sign contracts with Apple, Dell, and Hewlett-Packard and these firms in turn have contracts governing their relations with Best Buy, Staples, and other retailers. The steel firms sign contracts with the auto companies who in turn sign contacts with the car dealers and so on.

The contracts signed by the firms in these production and ...