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Optimal Retail Contracts with Asymmetric Information and Moral Hazard

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  • Benjamin F. Blair
  • Tracy R. Lewis

Abstract

Constrained joint-profit-maximizing retail contracts are derived when the dealer is privately informed about demand conditions before contracting with the manufacturer. Demand is increased by dealer promotion, which is unobservable by the manufacturer. Consequently, the manufacturer does not know whether to attribute a low level of sales to a decline in demand or to a lack of promotion. We show that, in general, the optimal contract exhibits some form of resale price maintenance and quantity fixing. The type of resale price maintenance and quantity fixing depends on how price and quantity affect the link between sales and promotion.

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Bibliographic Info

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

Volume (Year): 25 (1994)
Issue (Month): 2 (Summer)
Pages: 284-296

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Handle: RePEc:rje:randje:v:25:y:1994:i:summer:p:284-296

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Cited by:
  1. Salvatore Piccolo & David Martimort, 2006. "The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 160, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Dec 2006.
  2. Stefan Bühler & Dennis L. Gärtner, 2009. "Making Sense of Non-Binding Retail-Price Recommendations," University of St. Gallen Department of Economics working paper series 2009, Department of Economics, University of St. Gallen 2009-02, Department of Economics, University of St. Gallen.
  3. Jakub Kastl & David Martimort & Salvatore Piccolo, 2009. ""When Should Manufacturers Want Fair Trade?": New Insights from Asymmetric Information," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 218, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Apr 2010.
  4. Frank Mathewson & Ralph Winter, 1998. "The Law and Economics of Resale Price Maintenance," Review of Industrial Organization, Springer, Springer, vol. 13(1), pages 57-84, April.
  5. Jakub Kastl & David Martimort & Salvatore Piccolo, 2008. "Delegation and R&D Spending: Evidence from Italy," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 192, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 17 Oct 2009.
  6. Martimort, David & Piccolo, Salvatore, 2007. "Resale price maintenance under asymmetric information," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(2), pages 315-339, April.
  7. Atsuo Utaka, 2003. "An economic analysis of Japanese distribution systems," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(5), pages 411-416.
  8. Hempelmann, Bernd, 2006. "Optimal franchise contracts with private cost information," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(2), pages 449-465, March.
  9. Rosenkranz, Stephanie & Schmitz, Patrick W., 2001. "Vertikale Unternehmenskooperationen," MPRA Paper 6930, University Library of Munich, Germany.
  10. Antonio Acconcia & Riccardo Martina & Salvatore Piccolo, 2005. "Vertical Restraints under Asymmetric Information: On the Role of Participation Constraints," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 141, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2007.
  11. David Martimort & Salvatore Piccolo, 2010. "The Strategic Value of Quantity Forcing Contracts," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 2(1), pages 204-29, February.
  12. Guo, Pengfei & Song, Jing-Sheng & Wang, Yulan, 2010. "Outsourcing structures and information flow in a three-tier supply chain," International Journal of Production Economics, Elsevier, Elsevier, vol. 128(1), pages 175-187, November.
  13. Yaron Yehezkel, 2008. "Retailers' choice of product variety and exclusive dealing under asymmetric information," RAND Journal of Economics, RAND Corporation, RAND Corporation, vol. 39(1), pages 115-143.
  14. Pfeiffer, Thomas & Schneider, Georg, 2010. "How to elicit sequential retailer information optimally," Journal of Economics and Business, Elsevier, Elsevier, vol. 62(2), pages 147-159, March.
  15. Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2013. "Entry and Product Variety with Competing Supply Chains," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 343, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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