Motivating a Supplier to Test Product Quality

Yaron Yehezkel

Journal of Industrial Economics, 2014, vol. 62, issue 2, 309-345

Abstract: type="main">

This paper considers a supplier that offers a buyer a new product of unknown quality. The supplier can run a test that partially reveals unverifiable information concerning the quality, and the buyer can learn the actual quality after agreeing to buy the new product. I identify two main features of a contract for motivating the supplier to run the test. First, the contract may specify an upward or downward quantity distortion. Second, the contract may include slotting allowances, which may be welfare reducing when they discriminate against financially constrained suppliers.

Date: 2014
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