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Profit maximising rigid prices and vertical integration

Wadeson, N. (2017) Profit maximising rigid prices and vertical integration. International Journal of the Economics of Business, 24 (1). pp. 53-72. ISSN 1466-1829

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To link to this item DOI: 10.1080/13571516.2016.1199457

Abstract/Summary

This article explores profit maximising rigid pricing for a price setting firm and relates the results to vertical integration, which is an important area of corporate strategy and antitrust policy. The setting of a profit maximising rigid price is investigated in the face of a known distribution of short-run demand levels as a compromise between the flexible prices that would be appropriate in the short run at different levels of demand. The price and level of capacity are therefore set to maximise expected profits across varying levels of demand. With the help of computer simulations, it is shown that price rigidity increases the incentives for vertical integration particularly where upstream production is capital intensive, due to the increased importance of rationing. The incentives will also be particularly strong for more efficient and more capital intensive downstream production with low short-run marginal costs.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:65897
Publisher:Routledge

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