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How to elicit sequential retailer information optimally

  • Pfeiffer, Thomas
  • Schneider, Georg
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    In vertical relationships, manufacturers commonly rely on retailers to sell their goods. In this note, we analyze a manufacturer-retailer relationship in which a manufacturer delegates the sale of his product to a retailer who gets sequentially private information about the retail value of the product. At the time of contracting the retailer knows only the product's expected retail value, but subsequently learns the actual valuation. As a result, the retailer is tempted to understate the product's (expected) value in order to receive more favorable pricing conditions from the manufacturer. In this note, we characterize the optimal sequential screening contract using ex-post and ex-ante incentive constraints. Furthermore, we discuss the mechanism's properties. Moreover, we show how the optimal mechanism can be induced with two-part tariffs and with contracts based on returns. This allows us to discuss briefly which combination of the different instruments - returns, price floors, ex-ante and ex-post pricing - optimally elicits the retailer's private information.

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    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 62 (2010)
    Issue (Month): 2 (March)
    Pages: 147-159

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    Handle: RePEc:eee:jebusi:v:62:y::i:2:p:147-159
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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    1. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
    3. Melumad, Nahum D. & Reichelstein, Stefan, 1989. "Value of communication in agencies," Journal of Economic Theory, Elsevier, vol. 47(2), pages 334-368, April.
    4. Salvatore Piccolo & David Martimort, 2003. "Resale Price Maintenance under Asymmetric Information," CSEF Working Papers 107, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Apr 2007.
    5. Benjamin F. Blair & Tracy R. Lewis, 1994. "Optimal Retail Contracts with Asymmetric Information and Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 284-296, Summer.
    6. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
    7. Oana Secrieru, 2006. "The Economic Theory Of Vertical Restraints," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 797-822, December.
    8. Gal-Or, Esther, 1991. "Vertical Restraints with Incomplete Information," Journal of Industrial Economics, Wiley Blackwell, vol. 39(5), pages 503-16, September.
    9. Anil Arya & Brian Mittendorf, 2004. "Using Return Polices to Elicit Retailer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 617-630, Autumn.
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