Suppose that a representative downstream firm must buy relationship-specific capital before trading with an upstream monopolist. Under reasonable conditions, the monopolist would precommit to price to induce greater investment. If the monopolist were privately informed of its unit costs after the downstream firms invested, then the optimal contract would specify a maximum (" list") price which might be discounted (to "transactions" prices) if costs were low: a mode of pricing prevalent in interfirm trade. These results may explain why G. J. Stigler and J. K. Kindahl's medium-term price series tracked wholesale price indices whenever the latter were nondecreasing, but otherwise fell significantly faster. Copyright 1990 by The Econometric Society.
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|Date of creation:||1988|
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