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Collusive Effects of Vertical Restraints under Asymmetric Information

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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. 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.
  2. Chaim Fershtman & Kenneth L. Judd & Ehud Kalai, 1990. "Observable Contracts: Strategic Delegation and Cooperation," Discussion Papers 879, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Bruno Jullien & Patrick Rey, 2007. "Resale price maintenance and collusion," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 983-1001, December.
  4. Albaek, Svend & Mollgaard, Peter & Overgaard, Per B, 1997. "Government-Assisted Oligopoly Coordination? A Concrete Case," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 429-43, December.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  7. Shepard, Andrea, 1990. "Pricing Behavior and Vertical Contracts in Retail Markets," American Economic Review, American Economic Association, vol. 80(2), pages 427-31, May.
  8. Xavier Vives, 2001. "Oligopoly Pricing: Old Ideas and New Tools," MIT Press Books, The MIT Press, edition 1, volume 1, number 026272040x, December.
  9. Baron, David P. & Besanko, David, 1984. "Regulation and information in a continuing relationship," Information Economics and Policy, Elsevier, vol. 1(3), pages 267-302.
  10. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  11. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  12. Gal-Or, Esther, 1991. "Vertical Restraints with Incomplete Information," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 503-16, September.
  13. 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.
  14. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
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