NOTE ON DUOPOLISTIC VERTICAL RESTRAINTS

This paper reexamines a three-stage game previously applied by Gal-Or (Duopolistic vertical restraints, European Economic Review 35, 1237-12 53, 1991) to model manufacturers' choice of vertical restraints with d ownstream exclusive dealers. We show that the main result of the origi nal paper hinges upon the used linear demand specification. Employing a modified demand technology we find that a (LP,LP)-equilibrium can be compatible with high product differentiation as long as total demand is sufficiently inelastic. The elasticity of total demand turns out to have a decisive but so far neglected influence on double marginalizat ion and on manufacturers' choice of contract.