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Vertical Control with Bilateral Contracts

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Author Info
Daniel P. O'Brien
Greg Shaffer
Abstract

It is widely believed that a supplier who distributes her product through retailers can achieve the vertically integrated outcome with nonlinear contracts, provided the retail price is the only target of control and there is no uncertainty. We show that this result fails when retailers cannot observe their rivals' contracts, as incentives to choose each contract to maximize bilateral profits may yield retail prices well below the vertically integrated level. This provides a new explanation for vertical restraints, and it rationalizes an oft-expressed but never formalized view that resale price maintenance prevents countervailing buyer power from lowering retail prices.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 23 (1992)
Issue (Month): 3 (Autumn)
Pages: 299-308
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Handle: RePEc:rje:randje:v:23:y:1992:i:autumn:p:299-308

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  1. Chrysovalantou Milliou & Emmanuel Petrakis, 2005. "Upstream Horizontal Mergers, Bargaining, Vertical Contracts," Economics Working Papers we051507, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  2. Pio Baake & Ulrich Kamecke & Hans-Theo Normann, 2001. "Vertical Integration and Market Foreclosure with Convex Downstream Costs," Discussion Papers of DIW Berlin 260, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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  3. Igor Muraviev, 2007. "Equilibrium Configurations of Distribution Channels in Bilaterally Oligopolistic Industries," Pre- and Post-Print documents hal-00243078_v1, HAL. [Downloadable!]
  4. Claire Chambolle & Sofia Villas-Boas, 2007. "Buyer Power through Producer's Differentiation," Pre- and Post-Print documents hal-00243058_v1, HAL. [Downloadable!]
  5. Michiel Bijlsma & Viktoria Kocsis & Victoria Shestalova & Gijsbert Zwart, 2008. "Vertical foreclosure, a policy framework," CPB Documents 157, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  6. Chrysovalantou Miliou & Emmanuel Petrakis, 2005. "Upstream Horizontal Mergers, Bargaining and Vertical Contracts," Working Papers 0509, University of Crete, Department of Economics. [Downloadable!]
  7. Ali Hortacsu & Chad Syverson, 2007. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," NBER Working Papers 12894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Kyle Bagwell & Robert W. Staiger, 2004. "Backward Stealing and Forward Manipulation in the WTO," NBER Working Papers 10420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Joao Carlos Correia Leitao, 2004. "Optimal Divisionalization for Selling Networks of Cable Television Services," Industrial Organization 0403004, EconWPA. [Downloadable!]
  11. Ilya Segal, 1998. "Contracting with Externalities," Public Economics 9802002, EconWPA. [Downloadable!]
  12. MIKLOS-THAL, Jeanine & REY, Patrick & VERGÉ, Thibaud, 2008. "Buyer Power and Intraband Coordination," IDEI Working Papers 500, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  13. Zava Aydemir & Stefan Buehler, 2002. "Estimating Vertical Foreclosure in U.S. Gasoline Supply," Working Papers 0212, University of Zurich, Socioeconomic Institute. [Downloadable!]
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  14. Joshua Gans & Catherine de Fontenay, 2004. "Vertical Integration in the Presence of Upstream Competition," Econometric Society 2004 North American Winter Meetings 7, Econometric Society. [Downloadable!]
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  15. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion?," PIER Working Paper Archive 03-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
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  16. Nigel Driffield, 1999. "Regulation of the Petrol Industry in the UK: Issues and Evidence," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 6(3), pages 349-365, November. [Downloadable!] (restricted)
  17. Caprice, S., 2001. "Faut-il ou non interdire la discrimination ?," Economics Working Paper Archive (Toulouse) 27, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse). [Downloadable!]
  18. Joshua S Gans, 2004. "Vertical Contracting When Competition for Orders Precedes Procurement," Econometric Society 2004 Australasian Meetings 123, Econometric Society. [Downloadable!]
  19. Choong-Young Jung & Jae-Cheol Kim & Sang-Ho Lee, 2000. "An Incentive Contract With Asymmetric Information," International Economic Journal, Korean International Economic Association, vol. 14(1), pages 99-110, April. [Downloadable!] (restricted)
  20. REY, Patrick & VERGÉ, Thibaud, 2003. "Bilateral Control with Vertical Contracts," IDEI Working Papers 202, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  21. James D. Dana & Kathryn Spier, 2000. "Revenue Sharing, Demand Uncertainty, and Vertical Control of Competing Firms," Econometric Society World Congress 2000 Contributed Papers 1511, Econometric Society. [Downloadable!]
  22. REY, Patrick & SEABRIGHT, Paul & TIROLE, Jean, 2001. "The Activities of a Monopoly Firm in Adjacent Competitive Markets: Economic Consequences and Implications for Competition Policy," IDEI Working Papers 132, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2002. [Downloadable!]
  23. JULLIEN, Bruno & REY, Patrick, 2000. "Resale Price Maintenance and Collusion," IDEI Working Papers 102, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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