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Bilateral Control with Vertical Contracts

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  • Patrick Rey
  • Thibaud Verge

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Abstract

When a manufacturer contracts secretly with competing retailers he is subject to opportunism, and linear or non-linear tariffs may not allow the manufacturer to maintain monopoly prices. To analyse the effects of RPM, O'Brien-Shaffer (1992) use a concept of contract equilibrium which concentrates on pairwise deviations thereby questioning the robustness of the analysis. This paper emphasises the distinction between the contract equilibrium and standard non-cooperative concepts. We advocate for some caution in the use of the former concept, as if overlooks an inexistence problem. We then confirm the intuition that RPM can help solve the manufacturer's commitment problem. This confirms that O'Brien-Shaffer's insight is robust and validates the courts' reluctance against RPM.

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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series The Centre for Market and Public Organisation with number 02/048.

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Length: 36 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:bri:cmpowp:02/048

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Keywords: secret contracts; passive beliefs; wary beliefs; resale price maintenance;

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  1. Patrick de Graba, 1996. "Most-Favored-Customer Clauses and Multilateral Contracting: When Nondiscrimination Implies Uniformity," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(4), pages 565-579, December.
  2. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  3. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
  5. Martin, Stephen & Normann, Hans-Theo & Snyder, Christopher M, 2001. "Vertical Foreclosure in Experimental Markets," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 466-96, Autumn.
  6. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  7. DeGraba, Patrick & Postlewaite, Andrew, 1992. "Exclusivity Clauses and Best Price Policies in Input Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 423-54, Fall.
  8. Ilya Segal & Michael D. Whinston, 2003. "Robust Predictions for Bilateral Contracting with Externalities," Econometrica, Econometric Society, vol. 71(3), pages 757-791, 05.
  9. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
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