5. The Levi’s Strauss case

Course video 69 of 90

So far, we have mostly examined the markets in the context of the “firm – customers” relationship. In this lecture our analysis extends to more complicated relationships such that of “manufacturer – retailer – customers”. We will also generalize our setting to include all kinds of vertical relations between firms. When firms are vertically related, we observe an interesting phenomenon that creates tension between the two partners. This phenomenon is referred to as “double marginalization” and creates a vertical externality at the upstream market. Additionally, the opportunity of a retailer to provide demand stimulating pre-sale services may create a horizontal externality, causing the provision of service to end up sub-optimal. We will talk about resale price maintenance, exclusive dealing, exclusive territories and the importance of modern distribution systems. We will also present two interesting case studies: the Levi’s Strauss case and the “free corporate refrigerators” case.

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