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Collusive Effects of Vertical Restraints under Asymmetric Information

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Abstract

This paper points out that vertical delegation, implemented through the design of quantity discount contracts, may allow upstream producers, as well as downstream retailers, to achieve profits higher than those obtained under vertical integration or contracts based on price restrictions. Our result shows that when downstream competition is sufficiently tough, the design of suitable vertical restraints implements a market outcome closer to the monopoly benchmark, which has a detrimental effect on consumer surplus. Moreover, we argue that legally banning price restricting contracts is suboptimal, the reason being that they remove a double-marginalization effect created by asymmetric information between upstream producers and downstream retailers.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 113.

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Date of creation: 01 Jan 2004
Date of revision: 01 Jun 2004
Handle: RePEc:sef:csefwp:113

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  1. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  2. Gal-Or, Esther, 1991. "Vertical Restraints with Incomplete Information," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 503-16, September.
  3. Jullien, Bruno & Rey, Patrick, 2000. "Resale Price Maintenance and Collusion," CEPR Discussion Papers 2553, C.E.P.R. Discussion Papers.
  4. David Martimort, 1996. "Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 1-19, Spring.
  5. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  6. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  7. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  8. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-59, August.
  9. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  10. Svend Albæk & Peter Møllgaard & Per Baltzer Overgaard, 1997. "Government-Assisted Oligopoly Coordination? A Concrete Case," CIE Discussion Papers 1997-03, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  11. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  12. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  13. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  14. Shepard, Andrea, 1990. "Pricing Behavior and Vertical Contracts in Retail Markets," American Economic Review, American Economic Association, vol. 80(2), pages 427-31, May.
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