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Vertical Separation with Private Contracts

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Abstract

We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetry beliefs), vertical separation by all manufacturers is an equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behaviour by retailers in the final market. We characterize a condition for manufacturers' profits to be higher with private than with public contracts. Our results hold both with price and with quantity competition, and do not hinge on retailers' beliefs being perfectly symmetric.

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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 251.

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Date of creation: 26 Apr 2010
Date of revision: 09 Jul 2011
Publication status: Published in Economic Journal, 2012, Vol. 122, 173-207.
Handle: RePEc:sef:csefwp:251

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Keywords: Delegation; vertical separation; private contracts; symmetry beliefs;

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Cited by:
  1. Jon X. Eguia & Aniol Llorente-Saguer & Rebecca Morton & Antonio Nicolò, 2014. "Equilibrium Selection in Sequential Games with Imperfect Information," Working Papers 717, Queen Mary, University of London, School of Economics and Finance.
  2. Marco Pagnozzi & Salvatore Piccolo, 2012. "Information Sharing between Vertical Hierarchies," CSEF Working Papers 322, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Kopel, Michael & Brand, Björn, 2012. "Socially responsible firms and endogenous choice of strategic incentives," Economic Modelling, Elsevier, vol. 29(3), pages 982-989.

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