Essays on vertical restraints and vertical integration:

This dissertation contains three essays which examine vertical integration and vertical restraints. The first essay examines a vertical restraint, Minimum Advertised Price (MAP) which is often observed in vertical relations as a remedy for the horizontal externality in provision of service. Retailers provide a variety of services that affect the sale of their products such as demonstrations and the provision of information and advice. These retail services can generate horizontal externalities among retailers. In such a case, the individual retailer realizes less than the full effect on aggregate profits of his additional retail services and therefore provides less than the optimal level of service. This study shows that MAP can ensure optimal level of service and it duplicates the welfare outcome of vertical integration regardless of the level of service externality. The second essay explores the private and social desirability of vertical restraints imposed by a manufacturer on its retailers when there is uncertainty in demand or cost. A monopoly manufacturer offers a contract to retailers in an environment where the retailers compete in quantities and possess superior information about local demand conditions or their costs of distribution. Two vertical restraints are studied: Resale Price Maintenance and Exclusive Territories. In particular, this study shows that resale price maintenance and exclusive territories are not substitutes. If the retailers are infinitely risk averse, the manufacturer prefers resale price maintenance under demand uncertainty, and quantity competition under cost uncertainty. However, if the retailers are risk neutral, the manufacturer prefers resale price maintenance regardless of the type of uncertainty. The last essay examines affiliations that integrate physicians and hospitals. Managed care organizations shifted financial risks to health care providers by changing the payment method from fee-for-service to capitation. Due to this emerging financial risk, one of the strategies that physicians adopted was establishing affiliations with hospitals. This study performs an empirical analysis of the effect of the affiliation types on three important dimensions of health care: quality, cost, and price. The empirical results show that when the affiliation between a hospital and physicians is strong, the integrated organization operates more efficiently than independent hospitals. However, affiliations that weakly integrate hospitals and physicians produce a lower quality of health care with higher cost and price.Ph.D.Includes bibliographical references (p. 96-99)by Volkan Cetinkay