The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment

Salvatore Piccolo () and David Martimort

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We explore the strategic value of quantity forcing contracts in a competing manufacturer-retailer hierarchies environment under both adverse selection and moral hazard. Manufacturers dealing with (exclusive) competing retailers may prefer to leave contracts silent on retail prices, whenever other aspects of the retailers’ activity remain nonveri.able. Two effects are at play once one moves from retail price maintenance to quantity forcing. First, restricting the number of screening instruments available to manufacturers has a detrimental effect on their pro.ts as it leaves more possibilities to retailer for getting information rents. Second, such restriction may provide manufacturers with strategic power in that it affects downstream competition. Under some conditions related to the severity of the adverse selection problem and the nature of externalities across retailers, the latter effect may rationalize the use of quantity forcing contracts in a game of competing hierarchies. RPM may be either detrimental or bene.cial to welfare depending upon the type of non-market externalities that retailers impose on each other.

Keywords: Asymmetric Information; Competing Hierarchies; Incomplete Contracts; Quantity Forcing; Resale Price Maintenance; Vertical Contracting (search for similar items in EconPapers)
JEL-codes: D2 D23 D82 K21 (search for similar items in EconPapers)
Date: 2006-07-01, Revised 2006-12-08
New Economics Papers: this item is included in nep-com
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Citations: View citations in EconPapers (4)

Published in American Economic Journal: Microeconomics, 2010, 2(1), pp. 204-229.

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:160

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