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Quality Distortions in Vertical Relations

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  • Pio Baake
  • Vanessa von Schlippenbach

Abstract

This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that delivery contracts are more efficient the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.346396.de/dp968.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 968.

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Length: 26 p.
Date of creation: 2010
Date of revision:
Handle: RePEc:diw:diwwpp:dp968

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Keywords: Quality Uncertainty; Private Standards; Vertical Relations; Buyer Power;

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References

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  1. Roman Inderst & Christian Wey, 2005. "Buyer Power and Supplier Incentives," Discussion Papers of DIW Berlin 464, DIW Berlin, German Institute for Economic Research.
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  8. Switgard Feuerstein, 2005. "Collusion in Industrial Economics—A Survey," Journal of Industry, Competition and Trade, Springer, vol. 5(3), pages 163-198, December.
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  10. João VIEIRA-MONTEZ, 2004. "Downstream Concentration and Producer's Capacity Choice," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.13, Université de Lausanne, Faculté des HEC, DEEP.
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Citations

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Cited by:
  1. Gu, Yiquan & Wenzel, Tobias, 2012. "Transparency, entry, and productivity," Economics Letters, Elsevier, vol. 115(1), pages 7-10.
  2. Christin, Clémence, 2011. "Entry deterrence through cooperative R&D over-investment," DICE Discussion Papers 38, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  3. Stühmeier Torben & Wenzel Tobias, 2012. "Regulating Advertising in the Presence of Public Service Broadcasting," Review of Network Economics, De Gruyter, vol. 11(2), pages 1-23, June.
  4. Haucap, Justus & Herr, Annika & Frank, Björn, 2011. "In vino veritas: Theory and evidence on social drinking," DICE Discussion Papers 37, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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