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Vertical control, opportunism, and risk sharing

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  • Lømo, Teis Lunde

Abstract

A manufacturer who offers secret contracts faces an opportunism problem: She undercuts her own input prices and fails to offset retail competition. I show that this problem diminishes when retailers are risk averse and face demand uncertainty. Risk aversion and uncertainty create a bilateral risk sharing incentive that raises equilibrium input prices above marginal cost. The manufacturer can therefore profit from downstream risk aversion when retail competition is fierce.

Suggested Citation

  • Lømo, Teis Lunde, 2020. "Vertical control, opportunism, and risk sharing," Economics Letters, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:ecolet:v:191:y:2020:i:c:s0165176520300987
    DOI: 10.1016/j.econlet.2020.109114
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical relations; Secret contracting; Risk aversion;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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