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Contracting in hierarchical platforms

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  • Rong, Jianxin
  • Wang, Dazhong

Abstract

In a hierarchical platform, a downstream platform which monopolizes access to the consumer market enters into a contract with an upstream platform which contracts with multiple producers and raises the value of their products. This note applies the two-tier principal–agent model to analyze contracting in hierarchical platforms. We find that: (1) When the downstream and upstream platforms can enter into affine contracts, hierarchical platforms can increase social surplus while lowering producers’ payoffs; (2) When the downstream and upstream platforms can only sign revenue-sharing contracts, social surplus and the payoffs of the producers fall, and the downstream platform may choose to directly contract with the producers. We also investigate optimal contracting when nonlinear contracts can be adopted, and consider the impact of consumer heterogeneity on contracting.

Suggested Citation

  • Rong, Jianxin & Wang, Dazhong, 2023. "Contracting in hierarchical platforms," Economics Letters, Elsevier, vol. 226(C).
    • Handle: RePEc:eee:ecolet:v:226:y:2023:i:c:s0165176523001040
    DOI: 10.1016/j.econlet.2023.111079
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    References listed on IDEAS

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    More about this item

    Keywords

    Hierarchical platform; Two-tier contracting; Optimal contracts;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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