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How to elicit sequential retailer information optimally

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  • Pfeiffer, Thomas
  • Schneider, Georg
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    Abstract

    In vertical relationships, manufacturers commonly rely on retailers to sell their goods. In this note, we analyze a manufacturer-retailer relationship in which a manufacturer delegates the sale of his product to a retailer who gets sequentially private information about the retail value of the product. At the time of contracting the retailer knows only the product's expected retail value, but subsequently learns the actual valuation. As a result, the retailer is tempted to understate the product's (expected) value in order to receive more favorable pricing conditions from the manufacturer. In this note, we characterize the optimal sequential screening contract using ex-post and ex-ante incentive constraints. Furthermore, we discuss the mechanism's properties. Moreover, we show how the optimal mechanism can be induced with two-part tariffs and with contracts based on returns. This allows us to discuss briefly which combination of the different instruments - returns, price floors, ex-ante and ex-post pricing - optimally elicits the retailer's private information.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 62 (2010)
    Issue (Month): 2 (March)
    Pages: 147-159

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    Handle: RePEc:eee:jebusi:v:62:y::i:2:p:147-159

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    Web page: http://www.elsevier.com/locate/jeconbus

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    Keywords: Retailer Manufacturer Sequential private information;

    References

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    1. Oana Secrieru, 2006. "The Economic Theory Of Vertical Restraints," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 797-822, December.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Gal-Or, Esther, 1991. "Vertical Restraints with Incomplete Information," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 503-16, September.
    4. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
    5. Benjamin F. Blair & Tracy R. Lewis, 1994. "Optimal Retail Contracts with Asymmetric Information and Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 284-296, Summer.
    6. Martimort, David & Piccolo, Salvatore, 2007. "Resale price maintenance under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 315-339, April.
    7. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    8. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
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