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Vertical coordination through renegotiation

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  • Özlem Bedre-Defolie

    (ESMT European School of Management and Technology)

Abstract

This paper analyzes the strategic use of bilateral supply contracts in sequential negotiations between one manufacturer and two differentiated retailers. Allowing for general contracts and retail bargaining power, I show that the first contracting parties have incentives to manipulate their contract to shift rent from the second contracting retailer and these incentives distort the industry profit away from the fully integrated monopoly outcome. To avoid such distortion, the first contracting parties may prefer to sign a contract which has no commitment power and can be renegotiated from scratch should the manufacturer fail in its subsequent negotiation with the second retailer. Renegotiation from scratch induces the first contracting parties to implement the monopoly prices and might enable them to capture the maximized industry profit. A slotting fee, an up-front fee paid by the manufacturer to the first retailer, and a menu of tariff-quantity pairs are sufficient contracts to implement the monopoly outcome. These results do not depend on the type of retail competition, the level of differentiation between the retailers, the order of sequential negotiations, the level of asymmetry between the retailers in terms of their bargaining power vis-à-vis the manufacturer or their profitability in exclusive dealing.

Suggested Citation

  • Özlem Bedre-Defolie, 2011. "Vertical coordination through renegotiation," ESMT Research Working Papers ESMT-11-08, ESMT European School of Management and Technology.
  • Handle: RePEc:esm:wpaper:esmt-11-08
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    File URL: http://static.esmt.org/publications/workingpapers/ESMT-11-08.pdf
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    References listed on IDEAS

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    9. Özlem Bedre-Defolie & Stéphane Caprice, 2011. "Merger Efficiency and Welfare Implications of Buyer Power," Discussion Papers of DIW Berlin 1144, DIW Berlin, German Institute for Economic Research.
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    14. repec:ccp:journl:v:1:y:2001:i:3:p:247-281 is not listed on IDEAS
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    Cited by:

    1. Özlem Bedre-Defolie & Stéphane Caprice, 2011. "Merger Efficiency and Welfare Implications of Buyer Power," Discussion Papers of DIW Berlin 1144, DIW Berlin, German Institute for Economic Research.
    2. Bedre-Defolie, Ö., 2012. "Vertical coordination through renegotiation," International Journal of Industrial Organization, Elsevier, pages 553-563.

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    Keywords

    vertical contracts; rent shifting; renegotiation; buyer power;

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