Vertical Restraints in a Model of Vertical Differentiation

Patrick Bolton and Giacomo Bonanno ()

The Quarterly Journal of Economics, 1988, vol. 103, issue 3, 555-570

Abstract: We consider the case of a manufacturer who sells a homogeneous good to retailers who compete in prices and "cum-sales" or "post-sales" services. We show that the optimal linear-price contract is inefficient from the point of view of the vertical structure and that simple forms of vertical restraints, such as resale price maintenance and franchise fees, dominate the optimal linear-price contract, but do not restore vertical efficiency. Our analysis is concluded with the description of an efficient contract.

Date: 1988
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