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Vertical Separation with Private Contracts

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Author Info

  • Marco Pagnozzi
  • Salvatore Piccolo

Abstract

We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetry beliefs), vertical separation by all manufacturers is an equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behaviour by retailers in the final market. We characterize a condition for manufacturers' profits to be higher with private than with public contracts. Our results hold both with price and with quantity competition, and do not hinge on retailers' beliefs being perfectly symmetric.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2011.02471.x
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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 122 (2012)
Issue (Month): 559 (03)
Pages: 173-207

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Handle: RePEc:ecj:econjl:v:122:y:2012:i:559:p:173-207

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Cited by:
  1. Marco Pagnozzi & Salvatore Piccolo, 2012. "Information Sharing between Vertical Hierarchies," CSEF Working Papers 322, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Jon X. Eguia & Aniol Llorente-Saguer & Rebecca Morton & Antonio Nicolò, 2014. "Equilibrium Selection in Sequential Games with Imperfect Information," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2014_04, Max Planck Institute for Research on Collective Goods.
  3. Kopel, Michael & Brand, Björn, 2012. "Socially responsible firms and endogenous choice of strategic incentives," Economic Modelling, Elsevier, vol. 29(3), pages 982-989.

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