Study On Business Decision Making Mechanism Of Vertical Difference In The Context Of Countervailing Power

In recent years,the concentration of retail industry has been increasing;as a consequent,the countervailing power has exerted a great influence on the vertical relationship.In theory,the traditional vertical constraint theory has also been revised due to the shift of market power between updtream and downstream;that is,the theory of.countervailing power is focused.In practice,the anti-mo nopoly policies regulating the countervailing power are constantly emerging.In real life,vertical differences are more and more common,such as "SuNing or GuoMei special offer","e-commerce special offer","promotion special offer".This paper focuses on the phenomenon of special offer with different quality by large retailers and online e-commerce.In other words,in the context of countervailing power,the market equilibrium and economic effect when the manufacturer produces vertically differentiated products.That is,vertical difference is introduced to the countervailing power theory.The previous analysis of countervailing power was based on horizontal product difference,i.e.,substitutability or complementarity.Based on vertical difference,i.e.quality difference,the paper fills the blank of the existing countervailing power theory.The research provides explaination of the phenomena in the practice of industry and theoretical basis for the establishment of relevant industry regulation policy.Mussa-Rossen model is adopted to describe the consumer utility from vertical differential product With the M-O vertical structure,the dynamic game model of bargaining between upstream and downstream is established.The upstream manufacturer has the seller's monopoly power;the downstream is duopoly,and the retailers compete by Cournot model,one of the retailers has countervailing power which is exogenous.Two-stage dynamic game is adopted.In the first stage,the upstream manufacturer makes decisions on the wholesale price of products with quality difference.Downstream retailers purchase two quality differentiated products.The wholesale price for the competitive retailer is determind by the manufacturers profit maximization;that of the retailer with countervailing power is determined by Nash bargaining,that is,the industry joint profit maximization.The second stage,two retailers competite by Cournot model Thus the retailing quantity and price are determined.The basic model is modified by the cost related to quality and revised by pricing model and retailor' service.The findings are detailed as following:(1)There is no enterprise dominating the vertical relationship.Manufacturers'decision on vertical differentiation is the response to the countervailing power.(2)The general conclusion is that,the countervailing power contributes to vertical differentiation,which is adopted to lower the price competition on the market and resist the profit shift.(3)In the basic model,the countervailing power makes the profit transfer to the downstream.And downstream competition makes part of the profit passed to the consumers.The larger vertical difference weakens the competition between retailers,enhances the manufacturers' pricing power,as a consequence,the profit are not passed on to consumers,thus has no positive effect on the consumer surplus.With smaller vertical difference,the competition between retailers becomes firece,more and more profits are transferred to consumers,which increasing the consumer surplus.In reality,when the cost related to quality is zero,manufacturer adopts the vertical differentiation strategy.(4)Considering cost related to quality,no matter in the form of fixed or variable,the countervailing power make the profit transfer to the downstream.The countervailing power contributes to the vertical difference;however the vertical differentiation strategy is not to resist the profit shift.And no matter how the retailers compete,there is a part of the profit passed to consumers,which has positive effect on consumer surplus.In reality,when the cost related to quality is fixed,manufacturer is not to adopt the vertical differentiation strategy;when the cost related to quality is variable and the countervailing power is high,manufacturer will adopt the vertical differentiation strategy.(5)In the context of countervailing power,when the manufactuer makes decision on vertical difference,compared to the linear pricing model,the profit under two-part tariff is greater than that under linear pricing model There is a fixed profit transfer between manufacturers and retailers;the pricing model has no effect on other market equilibrium,consumer surplus or social welfare effect.RPM is not adopted due to withdraw of the retailer with countervailing power.(6)The same as the case of model modified by cost related to quality,when considering the retailer service,no matter in the form of fixed or variable,the countervailing power make the profit transferred to the downstream.The countervailing power contributes to the vertical difference;however the vertical differentiation strategy is not to resist the profit shift.And no matter how the retailers compete,there is a part of the profit passed to consumers,which has positive effect on consumer surplus.In both forms,the vertical differentiation strategy does not contribute to increasing manufacturer profit all the time;only when the countervailing power is high,manufacturer will adopt the vertical differentiation strategy.