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Information exchange through secret vertical contracts

Author

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  • Jihwan Do

    (Yonsei University)

  • Nicolás Riquelme

    (Universidad de los Andes)

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.

Suggested Citation

  • Jihwan Do & Nicolás Riquelme, 2024. "Information exchange through secret vertical contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(3), pages 671-707, November.
    • Handle: RePEc:spr:joecth:v:78:y:2024:i:3:d:10.1007_s00199-023-01539-4
    DOI: 10.1007/s00199-023-01539-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Vertical contracting; Information exchange; Common agency; Retailer-manufacturer relation; Channel of distribution; Antitrust;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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