Price and non - price restraints when retailers are vertically differentiated

This paper considers vertical restraints in the context of an intrabrand competition model in which a single manufacturer deals with two vertically differentiated retailers. We establish two main results. First, if the market cannot be vertically segmented, the manufacturer will foreclose the low quality retailer either directly by dealing exclusively with the high quality retailer, or indirectly by setting a sufficiently high minimum resale price maintenance or a sufficiently high wholesale price to ensure that the low quality retailer cannot make a positive profit. Second, if the market can be vertically segmented, the manufacturer will impose customer restrictions by requiring the low quality retailer to deal only with consumers whose willingness to pay for quality is below some threshold. We show that this restriction benefits the manufacturer as well as consumers with low willingness to pay for quality, including some that are served by the high quality retailer, but it harms consumers with high willingness to pay for quality.