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Vertical Restraints under Asymmetric Information: On the Role of Participation Constraints

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Abstract

We study a manufacturer-retailer relationship where, besides the adverse selection and moral hazard components, it is explicitly considered a type-dependent participation constraint capturing the shadow cost of exclusive dealings. The welfare effects of contracts based on both retail price and sales are compared to those of contracts contingent solely upon sales. When the type-dependent outside option severely aspects the agency problem and contracts are set non-cooperatively, retail price restrictions may be detrimental to consumers. At the same time, if contracts are set cooperatively, we show that whenever sales-based contracts are observed they are detrimental to consumers.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 141.

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Date of creation: 01 Jul 2005
Date of revision: 01 Jan 2007
Publication status: Published in Journal of Industrial Economics, 2008, Volume LVI, June, No. 2, pages 379-401
Handle: RePEc:sef:csefwp:141

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Keywords: asymmetric information; countervailing incentive; double marginalization; resale price maintenance; vertical restraint; welfare;

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References

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  1. Gal-Or, Esther, 1991. "Vertical Restraints with Incomplete Information," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 503-16, September.
  2. Martimort, D., 1992. "Exclusive Dealing, Common Agency and Multiprincipals Incentive Thoery," Papers 92.278, Toulouse - GREMAQ.
  3. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Maskin, Eric & Riley, John, 1985. "Input versus output incentive schemes," Journal of Public Economics, Elsevier, vol. 28(1), pages 1-23, October.
  5. Gianni deFraja & Claudio Piga, 2000. "Strategic Debt in Vertical Relationships," Econometric Society World Congress 2000 Contributed Papers 0059, Econometric Society.
  6. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Jullien, Bruno & Rey, Patrick, 2000. "Resale Price Maintenance and Collusion," CEPR Discussion Papers 2553, C.E.P.R. Discussion Papers.
  8. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
  9. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  10. Patrick Rey & Jean Tirole, 1985. "The Logic of Vertical Restraints," Working papers 396, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Salvatore Piccolo & David Martimort, 2003. "Resale Price Maintenance under Asymmetric Information," CSEF Working Papers 107, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Apr 2007.
  12. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
  13. Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
  14. Khalil Fahad & Lawarree Jacques, 1995. "Input versus Output Monitoring: Who Is the Residual Claimant?," Journal of Economic Theory, Elsevier, vol. 66(1), pages 139-157, June.
  15. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September.
  16. Benjamin F. Blair & Tracy R. Lewis, 1994. "Optimal Retail Contracts with Asymmetric Information and Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 284-296, Summer.
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Cited by:
  1. Evans, Shane, 2010. "Menus of linear contracts in procurement with type-dependent reservation utility," Working Papers 10280, University of Tasmania, School of Economics and Finance, revised 05 Oct 2010.
  2. Jakub Kastl & David Martimort & Salvatore Piccolo, 2009. ""When Should Manufacturers Want Fair Trade?": New Insights from Asymmetric Information," CSEF Working Papers 218, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Apr 2010.

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