Exclusive Dealing, Common Agency, and Multiprincipals Incentive Theory

The strategic value of partial vertical integration

“…In our framework, a manufacturer exclusively deals with its retailer, which is reasonable in the presence of product-specific investments that have to be sunk before production decisions take place. 2 Moreover, in line with the main literature on competing hierarchies under asymmetric information (e.g., Coughlan and Wernerfelt 1989;Katz 1991;Martimort 1996;Martimort and Piccolo 2010), bilateral contracting within a supply hierarchy is secret. This reflects the natural idea that the trading rules specified in a contractual relationship are not observed by competitors and therefore cannot be used for strategic purposes.…”

“…For our purposes, early relevant contributions are Stiglitz (1988, 1995) and Gal-Or (1991a, 1991b) that explore the impact of vertical restraints on competition. Martimort (1996) investigates the choice of competing manufacturers between a common and an exclusive retailer in a setting of adverse selection. Martimort and Piccolo (2007) qualify the results of Gal-Or (1991c) about the choice between resale price maintenance and quantity fixing contracts, according to the retailers' technology for providing services.…”

“…The profits in (1) are interim expected, since they are evaluated at the contractual stage where R 1 is informed about its own costs θ 1 but does not know the costs θ 2 of the competitor M 2 − R 2 . We allow for positive correlation between retail costs (e.g., Gal-Or 1991b, 1999Martimort 1996), and therefore R 1 's uncertainty on θ 2 depends on the realization of θ 1 . This reflects the idea that in competitive markets the costs of rival firms are usually subject to common trends.…”

“…Contracting In line with relevant contributions on competing hierarchies under asymmetric information (e.g., Coughlan and Wernerfelt 1989;Gal-Or 1999;Kastl et al 2011;Katz 1991;Martimort 1996;Martimort and Piccolo 2010), bilateral contracting within a hierarchy is secret. We invoke the revelation principle (e.g., Myerson 1982) in order to characterize the set of incentive feasible allocations.…”

“…This would be interpreted as a violation of their rights and condemned by antitrust authorities. a solid foundation in the literature (e.g., Gal-Or 1991a, 1991b, 1992, 1999Kastl et al 2011;Martimort 1996;Martimort and Piccolo 2010) and can be justified on several grounds. For instance, a contract contingent on the retail price of the competitor may be condemned as a collusive practice by antitrust authorities.…”