Information exchange through secret vertical contracts

Jihwan Do () and Nicolas Riquelme
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Jihwan Do: Yonsei University

Economic Theory, 2024, vol. 78, issue 3, No 1, 707 pages

Abstract: Abstract We study a common agency problem in which two downstream firms, who are local monopolists and receive private demand signals, offer secret menus of two-part tariff contracts to their common supplier. While direct communication is not possible, they may still exchange their information through signal-contingent menus of vertical contracts. We show that a perfect Bayesian equilibrium exists in which information is transmitted, and downstream firms obtain nearly the first-best industry surplus. The use of both fixed charges and slotting fees is necessary for such a result. Our analysis provides a novel explanation for the use of slotting fees in vertical contracting based on its value as an information transmission device.

Keywords: Vertical contracting; Information exchange; Common agency; Retailer-manufacturer relation; Channel of distribution; Antitrust (search for similar items in EconPapers)
JEL-codes: D83 D86 L14 L40 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00199-023-01539-4

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