Quality Distortions in Vertical Relations

Pio Baake and Vanessa von Schlippenbach

No 968, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that delivery contracts are more efficient the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.

Keywords: Quality Uncertainty; Private Standards; Vertical Relations; Buyer Power (search for similar items in EconPapers)
JEL-codes: D82 L14 L15 (search for similar items in EconPapers)
Pages: 26 p.
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ind and nep-mic
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Citations: View citations in EconPapers (1)

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https://www.diw.de/documents/publikationen/73/diw_01.c.346396.de/dp968.pdf (application/pdf)

Related works:
Journal Article: Quality distortions in vertical relations (2011)
Working Paper: Quality distortions in vertical relations (2011)
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