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The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment

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Abstract

We explore the strategic value of quantity forcing contracts in a competing manufacturer-retailer hierarchies environment under both adverse selection and moral hazard. Manufacturers dealing with (exclusive) competing retailers may prefer to leave contracts silent on retail prices, whenever other aspects of the retailers’ activity remain nonveri.able. Two effects are at play once one moves from retail price maintenance to quantity forcing. First, restricting the number of screening instruments available to manufacturers has a detrimental effect on their pro.ts as it leaves more possibilities to retailer for getting information rents. Second, such restriction may provide manufacturers with strategic power in that it affects downstream competition. Under some conditions related to the severity of the adverse selection problem and the nature of externalities across retailers, the latter effect may rationalize the use of quantity forcing contracts in a game of competing hierarchies. RPM may be either detrimental or bene.cial to welfare depending upon the type of non-market externalities that retailers impose on each other.

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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 160.

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Date of creation: 01 Jul 2006
Date of revision: 08 Dec 2006
Publication status: Forthcoming in the American Economic Journal: Microeconomics.
Handle: RePEc:sef:csefwp:160

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Keywords: Asymmetric Information; Competing Hierarchies; Incomplete Contracts; Quantity Forcing; Resale Price Maintenance; Vertical Contracting;

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References

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Citations

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Cited by:
  1. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-94, March.
  2. Dessi, Roberta, 2009. "Contractual Execution, Strategic Incompleteness and Venture Capital," TSE Working Papers 09-075, Toulouse School of Economics (TSE).
  3. Dessi, Roberta, 2009. "Contractual Execution, Strategic Incompleteness and Venture Capital," IDEI Working Papers 465, Institut d'Économie Industrielle (IDEI), Toulouse.

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