Quality distortions in vertical relations
Pio Baake and
Vanessa von Schlippenbach
No 18, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)
Abstract:
This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a nonlinear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms' perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less effcient outcomes.
Keywords: Quality Uncertainty; Private Standards; Vertical Relations; Buyer Power (search for similar items in EconPapers)
JEL-codes: D82 L14 L15 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta, nep-ind and nep-mic
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Citations: View citations in EconPapers (9)
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Related works:
Journal Article: Quality distortions in vertical relations (2011) 
Working Paper: Quality Distortions in Vertical Relations (2010) 
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:18
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