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Vertical Separation with Private Contracts

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Abstract

We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetry beliefs), vertical separation by all manufacturers is an equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behaviour by retailers in the final market. We characterize a condition for manufacturers' profits to be higher with private than with public contracts. Our results hold both with price and with quantity competition, and do not hinge on retailers' beliefs being perfectly symmetric.

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  • Marco Pagnozzi & Salvatore Piccolo, 2010. "Vertical Separation with Private Contracts," CSEF Working Papers 251, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Jul 2011.
  • Handle: RePEc:sef:csefwp:251
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    Cited by:

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    3. Michele Bisceglia & Jorge Padilla & Salvatore Piccolo, 2019. "When Prohibiting Platform Parity Agreements Harms Consumers," CSEF Working Papers 542, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    4. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    5. Andrea Salanti, 2013. "Between the Scylla of Whig history and the Charybdis of methodological vacuum," Chapters, in: Marcel Boumans & Matthias Klaes (ed.), Mark Blaug: Rebel with Many Causes, chapter 14, pages 191-207, Edward Elgar Publishing.
    6. Emanuele Bacchiega & Olivier Bonroy, 2015. "On the benefits of contractual inefficiency in quality-differentiated markets," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 846-863.
    7. Matteo Bassi & Marco Pagnozzi & Salvatore Piccolo, 2015. "Product Differentiation by Competing Vertical Hierarchies," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(4), pages 904-933, October.
    8. Janssen, Maarten C.W., 2020. "Vertical contracts in search markets," International Journal of Industrial Organization, Elsevier, vol. 70(C).
    9. Enrique Andreu & Damien Neven & Salvatore Piccolo, 2022. "Price Authority and Information Sharing with Competing Principals," IHEID Working Papers 29-2022, Economics Section, The Graduate Institute of International Studies.
    10. Marco Pagnozzi & Salvatore Piccolo & Matteo Bassi, 2016. "Entry and Product Variety with Competing Supply Chains," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 520-556, September.
    11. Jeanine Miklós-Thal & Greg Shaffer, 2016. "Naked Exclusion with Private Offers," American Economic Journal: Microeconomics, American Economic Association, vol. 8(4), pages 174-194, November.
    12. Maarten Janssen & Sandro Shelegia, 2015. "Beliefs and Consumer Search," Vienna Economics Papers 1501, University of Vienna, Department of Economics.
    13. Bisceglia, Michele & Padilla, Jorge & Piccolo, Salvatore, 2021. "When prohibiting wholesale price-parity agreements may harm consumers," International Journal of Industrial Organization, Elsevier, vol. 76(C).
    14. Hunold, Matthias, 2020. "Manufacturer Cartels and Resale Price Maintenance," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224645, Verein für Socialpolitik / German Economic Association.
    15. Bakaouka, Elpiniki & Milliou, Chrysovalantou, 2018. "Vertical licensing, input pricing, and entry," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 66-96.
    16. Youping Li & Jie Shuai, 2017. "Vertical separation with location–price competition," Journal of Economics, Springer, vol. 121(3), pages 255-266, July.
    17. Chrysovalantou Milliou & Apostolis Pavlou, 2020. "Foreign direct investment in vertically related markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(1), pages 284-320, February.
    18. Piccolo, Salvatore & Pagnozzi, Marco, 2013. "Information sharing between vertical hierarchies," Games and Economic Behavior, Elsevier, vol. 79(C), pages 201-222.
    19. Kopel, Michael & Brand, Björn, 2012. "Socially responsible firms and endogenous choice of strategic incentives," Economic Modelling, Elsevier, vol. 29(3), pages 982-989.
    20. Lømo, Teis Lunde & Meland, Frode & Sandvik, Håvard Mork, 2020. "Do slotting allowances reduce product variety?," Working Papers in Economics 7/20, University of Bergen, Department of Economics.
    21. Hunold, Matthias & Schlütter, Frank, 2022. "Supply Contracts under Partial Forward Ownership," LIDAM Discussion Papers CORE 2022003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    22. Hunold, Matthias & Schlütter, Frank, 2019. "Vertical financial interest and corporate influence," DICE Discussion Papers 309, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    23. Izak Atiyas & Toker Doganoglu & Firat Inceoglu, 2021. "Upstream Competition with Complex and Unobservable Contracts," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(3), pages 399-429, May.
    24. Maria Carmela Ceparano & Jacqueline Morgan, 2015. "Equilibria Under Passive Beliefs for Multi-leader-follower Games with Vertical Information: Existence Results," CSEF Working Papers 417, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Jan 2017.
    25. Maria Carmela Ceparano & Jacqueline Morgan, 2017. "Equilibrium selection in multi-leader-follower games with vertical information," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(3), pages 526-543, October.

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    More about this item

    Keywords

    Delegation; vertical separation; private contracts; symmetry beliefs;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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