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The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment

We explore the strategic value of quantity forcing contracts in a competing manufacturer-retailer hierarchies environment under both adverse selection and moral hazard. Manufacturers dealing with (exclusive) competing retailers may prefer to leave contracts silent on retail prices, whenever other aspects of the retailers’ activity remain Two effects are at play once one moves from retail price maintenance to quantity forcing. First, restricting the number of screening instruments available to manufacturers has a detrimental effect on their pro.ts as it leaves more possibilities to retailer for getting information rents. Second, such restriction may provide manufacturers with strategic power in that it affects downstream competition. Under some conditions related to the severity of the adverse selection problem and the nature of externalities across retailers, the latter effect may rationalize the use of quantity forcing contracts in a game of competing hierarchies. RPM may be either detrimental or bene.cial to welfare depending upon the type of non-market externalities that retailers impose on each other.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 160.

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Date of creation: 01 Jul 2006
Date of revision: 08 Dec 2006
Publication status: Published in American Economic Journal: Microeconomics, 2010, 2(1), pp. 204-229.
Handle: RePEc:sef:csefwp:160
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