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Teaching notes for chapter 11

Vertical relations are one of the areas of most intense research activity in recent years. Although few IO texts devote an entire chapter to this topic, the amount of work developed during the 1980s and 90s more than justifies its separate treatment.

From the point of view of public policy, the main issue in this chapter is the conflict between efficiency reasons and market power motivations for different forms of vertical relations, from simple vertical restraints to full-fledged vertical integration. Although the analysis of public policy towards vertical relations is left to the end of the chapter, it may be worth starting off with the presentation of this conflict as a way to motivate the chapter. This is especially true if the audience is primarily composed of economics majors who are interested in public policy issues. (The same consideration applies to the merger analysis, which is introduced in Section 15.3.)

Contract theory plays a central role in the study of vertical relations. In fact, many of the developments in the theory of vertical relations have appeared in parallel with developments in contract theory. Most of these developments are rather technical and were therefore excluded from the main text. A series of supplemental sections present some of the main results, as well as bibliographic references to more thorough presentations of the material.

As suggested above, vertical relations are closely related to the topic of vertical integration, which is discussed in Section 3.2. (In vertical integration, we can also find the dichotomy between efficiency considerations and market power considerations.) In fact, one possibility is to discuss both topics at the same time, under the heading vertical restraints and vertical integration, or something similar.

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