This is an economic assignment in competition policy - 6 questions
A. [Resale Price Maintenance and Total Surplus] The first two parts of this question refer to the main source for Lecture 29: · Blair, R. D. & Whitman, J. (2018). Resale price maintenance: A managerial perspective. Managerial and decision economics, 39(7), 751-760. Retrieved from https://doi-org.ezproxy.library.uvic.ca/10.1002/mde.2920 Note that this source does most of the math for you. The paper calculates equilibrium prices, quantities, etc. for you. Your role is to put that information together to calculate total surplus. a. In lectures 29 and 30, we looked at the effect on consumer surplus and producer surplus of higher quality service made possible by resale price maintenance. What we did not do was calculate the change in welfare due from going from low quality service to high quality service, for a particular numerical example. That’s what you’re going to do here. Consider the following situation: · (Inverse) Retail demand given low quality service is D1 = P = 80 – Q/2 · (Inverse) Retail demand given high quality service is D2 = P = 120 – Q/2 · The producer’s marginal cost of production is MC = 30 · The marginal cost of low quality retail service is mc1 = 10 · The marginal cost of high quality retail service is mc2 = 20 · The producer charges retailers a wholesaler price w1 (when there is low quality service) and w2 (when there is high quality service). · The producer faces derived (inverse) demand of d1 = D1 – mc1 in the low quality service case, and d2 = D2 – mc2 in the high quality service case. The producer sets the wholesale price by setting its marginal revenue = MC. · Retailers are competitive price-takers. Their economic profit and surplus are zero. Calculate the change in total surplus in going from low quality retail service to high quality retail service. This equal to (Total Surplus given high quality service) – (Total surplus given low quality service). Remember that Total Surplus = Consumer Surplus + Producer Surplus Remember: You do NOT have to do most of the math, yourself! Section 3.2 of (Blair & Whitman, 2018) does most of the math for you, but does not go as far as calculating surpluses. The following diagrams from lecture 30 will also be helpful, as they point out the producer and consumer surplus for each case. Surplus from low quality service: i. Calculate total surplus (CS + Producer surplus) for the case of low-quality service. Show your work. (Note that this should be very simple. Consumer surplus is a triangle, producer surplus is a rectangle, and you can get the numbers you need for Q1, etc. from section 3.2 of the Blair & Whitman paper.) Consumer Surplus: $_______________ Producer Surplus: $_______________ Total Surplus: $___________________ Show your Work for part i.: Surplus from high quality service: ii. Calculate total surplus (CS + Producer surplus) for the case of high-quality service. Show your work. Consumer Surplus: $_______________ Producer Surplus: $________________ Total Surplus: $___________________ Show your work for part ii.: iii. Here, you’ll put your results together. What is the change in total surplus when we go from high quality service to low quality service? Show your work. $______________________ Show your work: In this example, is the high quality service made possible by society good for society or bad for society? Briefly explain your reasoning. Good or bad? ____________ Reasoning: b. Background: Nintendo, a video game company, is famous for many things – including resale price maintenance. Nintendo manufactures limited numbers of physical copies of its games – it is possible for stores to “run out” of a Nintendo game. Nintendo also requires that stores charge at least the “recommended retail price” for its games, and rarely allows retailers to discount them. If a retailer sells Nintendo games at an unauthorized discount, it risks being put at the bottom of the list for getting supplies of games. The games that Nintendo controls the price of are so-called ‘first party’ games developed and published by Nintendo itself, such as Super Mario Odyssey and The Legend of Zelda: Breath of the Wild. Games developed by other companies, such as Capcom’s Resident Evil, Blizzard’s Overwatch or Microsoft’s Minecraft, are not subject to resale price maintenance. Different companies will charge different prices for these games, and they will often be heavily discounted – sometimes by as much a 90% off of the digital version. The extent of Nintendo’s control over pricing became very clear recently, as Nintendo announced specific “Black Friday” discounts on its games at retailers that it does not own: “As it did in 2019, Nintendo is also knocking $20 off the suggested retail price of a handful of games, which will be available for $39.99 beginning on November 20 at participating retailers.”[footnoteRef:1] [1: Ivan, T. (2020, November 9). Nintendo of America has detailed its Black Friday deals, which are very similar to 2019’s [Web Page]. Retrieved from https://www.videogameschronicle.com/news/nintendo-of-america-has-detailed-its-black-friday-deals-which-are-very-similar-to-2019s/ ] The participating retailers include[footnoteRef:2] Target, Best Buy, Gamestop, Amazon and Walmart. [2: Holiday Gift Guide [Web Page]. (n.d.). Retrieved from https://www.nintendo.com/holiday/deals/ on November 22, 2020.] “The video game sale is taking place across multiple retailers, including Best Buy, Gamestop and Amazon. Everyone’s got basically the same lineup, with slight variations on what games they’re offering for what price, but look for first-party Nintendo titles like ‘Super Mario Maker 2,’ ‘Luigi’s Mansion 3’ and ‘The Legend of Zelda: Link’s Awakening’ for $39.99.”[footnoteRef:3] [3: Jaccoma, J. (2020, November 20). Nintendo Switch games are as low as $14.99 for Black Friday [Web Page]. Retrieved from https://www.sfgate.com/shopping/article/Nintendo-Switch-game-deals-Black-Friday-15739992.php ] Walmart has a larger discount than the rest: “There’s one big twist, though: Walmart is holding its Nintendo inventory back for its own Black Friday sale […] which will feature those first-party titles […] for $9 cheaper than everyone else.” In this question, you are asked to analyze Nintendo’s policy of resale price maintenance. i. Nintendo sells physical copies of its first-party games to the retailers (like Amazon and Walmart), and the retailers sell to the customers. Given that the retailers have to pay Nintendo’s wholesale price to buy the games, why should Nintendo care if the retailers decide to lower the retail price of the game? What does Nintendo have to gain from resale price maintenance? Note: For full marks, you can’t just say (for example) ‘high quality service’. You need to explain what the benefit is to Nintendo, a specific real-world company, from keeping the retail price of its first-party games high at retailers like Amazon, Best Buy, etc. (If you believe that the answer IS high quality service, is there really a difference in service provided by Amazon for first-party Nintendo games vs. other games not subject to resale price maintenance?) i. How does Nintendo benefit from resale price maintenance on its first party games? Briefly explain your reasoning. This question may require some research. Cite any sources you use in APA format. ii. Walmart has announced that it will sell Nintendo games for $9 less than other ‘participating retailers’. Why does Walmart get to do this when Amazon and Best Buy can’t? This question may require some research. Cite any sources you use in APA format. iii. In your opinion as a student of economics and competition policy, is Nintendo’s policy of resale price maintenance good for society or bad for society? (For the purposes of this question, society includes consumers of Nintendo games, Nintendo itself and ‘participating retailers’.) Briefly explain your reasoning. 2 (Blair & Whitman, 2018) MC D2 Q2 P2 w2 Price, Cost Quantity Producer Surplus CS (Blair & Whitman, 2018) MC D 2 Q 2 P 2 w 2 Price, Cost Quantity Producer Surplus CS (Blair & Whitman, 2018) MC D1 P1 w1 Q1 Price, Cost Quantity CS Producer Surplus (Blair & Whitman, 2018) MC D 1 P 1 w 1 Q 1 Price, Cost Quantity CS Producer Surplus Resale price maintenance: A managerial perspective Received: 16 January 2018 Accepted: 31 January 2018 DOI: 10.1002/mde.2920 R E S E A R CH AR T I C L E Resale price maintenance: A managerial perspective Roger D. Blair1 | Joseph Whitman2 1Department of Economics, University of Florida, and Affiliate Faculty, Levin College of Law, University of Florida, Gainesville, FL, USA 2Department of Economics, University of Florida, Gainesville, FL, USA Correspondence Joseph Whitman, Department of Economics, University of Florida, Gainesville, FL, USA. Email:
[email protected] I want to thank James Fesmire, Jill Herndon, John for their past collaboration. Manage Decis Econ. 2018;39:751–760. Managers can improve firm profits by selecting the appropriate pricing strategy. In this article, we show how managers can use one particular controversial pricing strategy—resale price maintenance (RPM)—to enhance firm profits. We first discuss the antitrust treatment of RPM, both in the United States and internationally. Then we examine the economic effects of implementing RPM in several key contexts: product promotion, quality certification, prestige goods, and online retail. We also discuss the effects of RPM on entry of new firms. 1 | INTRODUCTION There are many pricing strategies that a manager could pursue in an effort to enhance the firm's profits. In this article, we examine a controversial pricing strategy known as resale price maintenance (RPM). When a manager sells the firm's product to a distributor on the condition that the distributor's resale price not fall below a specified minimum, he or she is imposing RPM on the distributor. Thus, RPM is a vertical pricing restraint that limits a reseller's ability to reduce the retail price. This seems like an odd restraint because the manufacturer would sell a larger quantity if the retail price were reduced. At first blush, it is not entirely obvious how RPM improves profits; which is what makes RPM interesting from a managerial perspective. Until recently, RPM was a per se violation of the antitrust laws. Now, however, RPM is subject to rule of reason treatment in the United States, which means that the strategy is permissible unless its consequences are anticompetitive. In Section 2, we provide a brief overview of the US antitrust treatment of RPM and that of most other countries. In Section 3, we show that RPM improves the manufacturer's profits by inducing the distributor to promote the product. In Section 4, our attention centers on the use of RPM to signal product quality. In Section 5, we explain how RPM is especially beneficial for manufacturers of prestige goods. In Section 6, we discuss how RPM can facilitate the entry of new firms and product lines. In Section 7, we examine RPM given the rise of online discount retailers.