Franchise Contracts with Ex Post Limited Liability
AbstractThis paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which in uences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer.
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Bibliographic InfoPaper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 10281.
Length: 40 pages
Date of creation: 05 Oct 2010
Date of revision: 05 Oct 2010
Publication status: Published by the University of Tasmania. Discussion paper 2010-10
Franchise Fee; Limited Liability; Vertical Restraints;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
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