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The opportunism problem revisited: The case of retailer sales effort

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Abstract

We study a setting where the opportunism or commitment problem identifed by Hart and Tirole (1990) may arise. An upstream monopolist may sell its product to two differentiated downstream retailers. Contract unobservability induces the manufacturer and each retailer to free-ride on margins earned by rival retailers, resulting in low transfer prices and low overall profit. O'Brien and Shaffer (1992) proposed a solution to this problem involving squeezing retail margins by using maximum RPM and high transfer prices. We show that when retail demand depends in any degree of retail sales effort, this equilibrium breaks down, and the opportunism problem reappears with full force. We show that no type of own-sale contracts or combination of own-sale restraints will solve the problem if sales effort matter. Moreover we show that certain horizontal commitments, as for example industrywide minimum RPM, may restore the fully integrated outcome, but only in special cases.

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  • Staahl Gabrielsen, Tommy & Johansen, Bjørn Olav, 2013. "The opportunism problem revisited: The case of retailer sales effort," Working Papers in Economics 07/13, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2013_007
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    Cited by:

    1. João Montez, 2015. "Controlling opportunism in vertical contracting when production precedes sales," RAND Journal of Economics, RAND Corporation, vol. 46(3), pages 650-670, September.

    More about this item

    Keywords

    Opportunism; RPM; sales effort;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • 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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