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The Strategic Value of Quantity Forcing Contracts

  • David Martimort
  • Salvatore Piccolo

We explore the strategic value of quantity forcing contracts in a manufacturer-retailer 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 nonverifiable. Two effects are at play when moving from retail price maintenance to quantity forcing. First, restricting screening possibilities may increase retailers' rent. Second, such a restriction affects downstream competition. This latter effect may justify using quantity forcing contracts and, more generally, shed light on a novel source of contractual incompleteness. (JEL D82, D86, L14)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 204-29

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:1:p:204-29
Note: DOI: 10.1257/mic.2.1.204
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