Contracting in hierarchical platforms

Jianxin Rong and Dazhong Wang

Economics Letters, 2023, vol. 226, issue C

Abstract: In a hierarchical platform, a downstream platform which monopolizes access to the consumer market enters into a contract with an upstream platform which contracts with multiple producers and raises the value of their products. This note applies the two-tier principal–agent model to analyze contracting in hierarchical platforms. We find that: (1) When the downstream and upstream platforms can enter into affine contracts, hierarchical platforms can increase social surplus while lowering producers’ payoffs; (2) When the downstream and upstream platforms can only sign revenue-sharing contracts, social surplus and the payoffs of the producers fall, and the downstream platform may choose to directly contract with the producers. We also investigate optimal contracting when nonlinear contracts can be adopted, and consider the impact of consumer heterogeneity on contracting.

Keywords: Hierarchical platform; Two-tier contracting; Optimal contracts (search for similar items in EconPapers)
JEL-codes: D44 D82 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523001040

DOI: 10.1016/j.econlet.2023.111079

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