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Collusive Effects of Vertical Restraints under Asymmetric Information

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This paper points out that vertical delegation, implemented through the design of quantity discount contracts, may allow upstream producers, as well as downstream retailers, to achieve profits higher than those obtained under vertical integration or contracts based on price restrictions. Our result shows that when downstream competition is sufficiently tough, the design of suitable vertical restraints implements a market outcome closer to the monopoly benchmark, which has a detrimental effect on consumer surplus. Moreover, we argue that legally banning price restricting contracts is suboptimal, the reason being that they remove a double-marginalization effect created by asymmetric information between upstream producers and downstream retailers.

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  • Jakub Kastl & Salvatore Piccolo, 2004. "Collusive Effects of Vertical Restraints under Asymmetric Information," CSEF Working Papers 113, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jun 2004.
  • Handle: RePEc:sef:csefwp:113
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    File URL: http://www.csef.it/WP/wp113.pdf
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    1. Fershtman, Chaim & Judd, Kenneth L & Kalai, Ehud, 1991. "Observable Contracts: Strategic Delegation and Cooperation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 551-559, August.
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    13. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-122, February.
    14. Shepard, Andrea, 1990. "Pricing Behavior and Vertical Contracts in Retail Markets," American Economic Review, American Economic Association, vol. 80(2), pages 427-431, May.
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