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Vertical Contracts as Strategic Commitments: How are They Enforced?

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  • Cindy R. Alexander
  • David Reiffen

Abstract

This paper addresses the strategic commitment value of various price and nonprice vertical contracts. Assuming contract offers are sufficiently public to have strategic importance, we focus on commitment as a necessary and separable condition to be met. The analysis has two components. First, considering the relationship between a monopolist manufacturer and his imperfectly competing retailers, enforcement conditions necessary for alternative vertical contracts to have commitment value are identified in the static (reputation‐free) context. It is shown that external help (i.e., enforcement by nonsignatories) is necessary for bilateral minimum resale price maintenance (price floors) and exclusive territory contracts to have commitment value, whereas maximum resale price maintenance (price ceilings) do not require such help (i.e., they are internally enforcing). Second, the paper provides an analysis of the U.S. case law and discusses the empirical validity of the “external enforcement” assumption that is shown to underlie recent proposals to make certain vertical restraints illegal.

Suggested Citation

  • Cindy R. Alexander & David Reiffen, 1995. "Vertical Contracts as Strategic Commitments: How are They Enforced?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(4), pages 623-649, December.
    • Handle: RePEc:bla:jemstr:v:4:y:1995:i:4:p:623-649
    DOI: 10.1111/j.1430-9134.1995.00623.x
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    References listed on IDEAS

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    1. Baye, Michael R. & Kovenock, Dan, 1994. "How to sell a pickup truck : 'Beat-or-pay' advertisements as facilitating devices," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 21-33, March.
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    Cited by:

    1. Takeshi Ikeda & Daisuke Nikae, 2006. "Exclusive territories in the presence of upstream competition," Economics Bulletin, AccessEcon, vol. 4(26), pages 1-6.
    2. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    3. Corts, Kenneth S. & Neher, Darwin V., 2003. "Credible delegation," European Economic Review, Elsevier, vol. 47(3), pages 395-407, June.
    4. repec:ebl:ecbull:v:4:y:2006:i:26:p:1-6 is not listed on IDEAS
    5. Daisuke Nikae & Takeshi Ikeda, 2005. "The economic theory of quasi-exclusive territory," Industrial Organization 0508002, University Library of Munich, Germany.
    6. Lucy White, 2007. "Foreclosure with Incomplete Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(2), pages 507-535, June.
    7. Marx, Leslie M. & Shaffer, Greg, 2004. "Opportunism and menus of two-part tariffs," International Journal of Industrial Organization, Elsevier, vol. 22(10), pages 1399-1414, December.
    8. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, vol. 57(7), pages 1250-1266, July.
    9. Michael L. Katz, 2006. "Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 685-706, September.
    10. Alexander, Cindy R, 1999. "On the Nature of the Reputational Penalty for Corporate Crime: Evidence," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 489-526, April.
    11. Baake, Pio & Kamecke, Ulrich & Normann, Hans-Theo, 2004. "Vertical foreclosure versus downstream competition with capital precommitment," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 185-192, February.

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