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Matilda Bottlers bottles and distributes wines and spirits in Australia. Big Gator is a conglomerate that manufactures, among other things, a popular lager beer. By virtue of a lifetime contract, Matilda has exclusive rights to bottle and distribute Big Gator Beer in New South Wales, the largest state in Australia. Matilda uses its monopsony power to pay a lower price for Big Gator Beer than do bottlers in other states. Is this sufficient justification for Big Gator to buy out Matilda Bottlers?
Big Gator should not automatically buy out Dixie simply because Dixie is able to pay a lower price for Big Gators products. Rather, Big Gator should determine whether there is a vertical market failure that would justify a decision to vertically integrate. Reasons Big Gator should not vertically integrate: The profits earned by Matilda Bottlers (which incorporate the discounted price for Big Gator Products) will be incorporated in the price that Big Gator pays for Matildas bottling operation. Therefore, Big Gator cannot avoid giving Matilda some or all of the benefit of Matildas current monopsony position. Supplier and distributor goals are aligned sell output for maximum profits. Performance is easy to observe and output is measurable. Transactions are frequent and simple and are easy to contract. By allowing the distributor to keep profits, the manufacturer is ensuring that the distributor will continue to make relationship specific investment and to run an efficient distribution operation. The distributor controls the amount of effort to put…

o distribution, so it may be good to allow the distributor to share some profit in order to provide incentives. Reasons Big Gator should vertically integrate: Relationship specificinvestment is required from the distributor, so the relationship may be subject to a hold up problem. If product prices are driven so low that hold up is causing vertical market failure or that excessive costs are incurred (from distrust, frequent contract renegotiations, less relationship specific investment, or investing to ensure ex-post bargaining power), then the manufacturer may consider integrating into the distributor. The manufacturer should own the distributor because it ultimately commands most of the surplus in the national arena.



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