Vertical Contracting with Informational Opportunism †

Abstract : We consider vertical contracting arrangements between a manufacturer and a retailing network when retailers have private information and the organization is run through bilateral contracts. We highlight a new form of informational opportunism arising when the manufacturer manipulates information learned separately in each relationship. We characterize the set of allocations robust to such opportunism by means of simple ex post incentive compatibility constraints. Those constraints limit the manufacturer's ability to use yardstick competition among retailers. They simplify contracts and restore a rent/efficiency trade-off even with correlated information. We show that sellout contracts are optimal under a wide range of circumstances. (JEL D21, D86, L14, L60, L81) The structure and performances of vertical networks linking upstream manufacturers with their downstream retailers have attracted much attention in the theoretical industrial organization literature over recent years. That surge of interest was certainly motivated by the importance of mediated transactions and services in our modern economies but also by the richness of actual contractual practices whose welfare implications have repeatedly been a concern for competition authorities. Following seminal works by Hart and Tirole (1990); O'Brien and Shaffer (1992); McAfee and Schwartz (1994); Segal (1999); and Segal and Whinston (2003), a key insight brought by this research is that the performances of those vertical structures crucially depend on the commitment ability of the upstream manufacturer while. Parts of the material in this paper were circulated earlier under the titles " Mechanism Design with Private Communication " and " Mechanism Design with Bilateral Contracting. " Financial support from FERDI and from the program Investissements d'Avenir of the French government (ANR-10-LABX-14-01 and ANR-10-LABX-93-01) is gratefully acknowledged. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. † Go to http://dx.doi.org/10.1257/aer.20121640 to visit the article page for additional materials and author disclosure statement(s).
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American Economic Review, 2015, 105 (7), p. 〈10.1257/aer.20121640〉
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Vianney Dequiedt, David Martimort. Vertical Contracting with Informational Opportunism †. American Economic Review, 2015, 105 (7), p. 〈10.1257/aer.20121640〉. 〈hal-01225714〉

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