Information Asymmetry, Manufacturer–retailer Contracts, and Two‐sided Entry

Abstract

We investigate the economic determinants of contract structure and entry with transfer contracts, which specify that manufacturers directly sell their products in retail stores while retailers collect sales revenue and return a transfer to the manufacturers. Using a unique data set describing entry decisions of clothing manufacturers into a retail department store, we estimate a two‐sided, asymmetric‐information entry model. We compare profit estimates under transfer contracts to counterfactual profit estimates under common alternative contract formats. Results show that, when adverse selection is present, transfer contracts dominate other contract formats from the retailer's perspective; otherwise, the common alternative contract formats dominate.