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"When Should Manufacturers Want Fair Trade?": New Insights from Asymmetric Information

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Author Info

  • Jakub Kastl

    (Stanford University)

  • David Martimort

    (Toulouse School of Economics)

  • Salvatore Piccolo

    () (University of Naples "Federico II", CSEF and Toulouse School of Economics,)

Abstract

We study a specific model of competing manufacturer-retailer pairs where adverse selection and moral hazard are coupled with non-market externalities at the downstream level. In this simple framework we show that a “laissez- faire" approach towards vertical price control might harm consumers as long as privately informed retailers impose non-market externalities on each other. Giving manufacturers freedom to control retail prices harms consumers when retailers impose positive non-market externalities on each other, and the converse is true otherwise. Moreover, in contrast to previous work, we show that, in these instances, consumers' and suppliers' preferences over contractual choices are not necessarily aligned.

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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 218.

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Date of creation: 12 Mar 2009
Date of revision: 08 Apr 2010
Publication status: Published in Journal of Economics & Management Strategy, 2011, Vol. 20, 649-677.
Handle: RePEc:sef:csefwp:218

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Keywords: Competing hierarchies; resale price maintenance; retail externalities;

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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. Martimort, David & Piccolo, Salvatore, 2010. "The Strategic Value of Quantity Forcing Contracts," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
  4. Antonio Acconcia & Riccardo Martina & Salvatore Piccolo, 2005. "Vertical Restraints under Asymmetric Information: On the Role of Participation Constraints," CSEF Working Papers 141, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jan 2007.
  5. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  6. 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.
  7. 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.
  8. Esther Gal-Or, 1991. "A Common Agency with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 22(2), pages 274-286, Summer.
  9. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  10. Kai-Uwe Kuhn, 1997. "Nonlinear Pricing in Vertically Related Duopolies," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 37-62, Spring.
  11. 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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