Analysis Of Vertical Control Strategies Between Producers And Retailers

In the process of circulation of products, typically the products are distributed by the upstream producers to the downstream retailers, and then the downstream retailers sell the products to the consumers directly. The upstream and downstream enterprises constitute the product circulation channels, forming a vertical industry chain. The market is becoming more and more competitive, in order to make more profits, both upstream and downstream enterprises want to control the other party through a variety of vertical control strategies. In general, there are somevertical control strategies, like slotting fees, exclusive areas, resale price maintenance(RPM) and so on. In this article, mainly discuss about when the upstream producers with a strong market forces implement the RPM on the downstream retailers, the influence on the aspects of the whole market.The resale price maintenance(RPM) refers to the upstream producers controlling the final price that the downstream retailers selling to the consumers. Review the articles about the problem of the RPM in the past, we find that there are mostly two aspects to determine the effect of the RPM. They are the efficiency improvement effect and the anti-competition effect. According to the different views, whether should ban the upstream producers implementing RPM to the downstream retailers or not, different people have different views. Due to the different market environment and economic system in different countries, our country can’t copy the same attitude and law from the other countries directly towards this issue, and we should determine this issue combining with our specific market structure reasonably.This article mainly discusses about the following market structure: the two upstream producers are competing in the oligopoly structure, and the downstream retailers are competing in the monopoly competition structure. In the background, analyze the market equilibrium analysis. Model in the following three aspects: first, when the two producers don’t implement the RPM; the second, only one producer implement the RPM and the other doesn’t; third, both the producers implement the RPM. Then under the different assumptions, analyze the market equilibrium and the consumer welfare respectively. Select the Bowley demand function, set the parameter equaling 0.8. And under the market equilibrium, compare the price of the products, the producers and retailers’ profits. Through the analysis, I find that the products’ price is the lowest when the two producers don’t implement the RPM. This means that the consumers benefit the most. The products’ price is higher when the both producers implement RPM than the price under only one producer implementing RPM. Moreover, the producers’ profits are more and the retailers’ profits are less. In a word, more producers implement the RPM, the more damage to the market competition and more damage to the consumers’ welfare.Finally, analyze the case about the two leading companies Maotai and Wu Liangye in the wine market which implement the RPM on the downstream retailers. The competition between the two wine companies are similar to the models above. What’s more, the two companies produce the similar but not identical wine. Apply the conclusion to this case, I can find that the RPM from the two companies implementing to the retailer do a lot harm to the consumers’ welfare and the retailers’ profits. So this behavior should be banned, and the conclusion from this article can provide the theoretical basis for the legislature. Also the conclusion can play an important role in for the development between upstream producers and downstream retailers.