VERTICAL RESTRAINTS UNDER ASYMMETRIC INFORMATION: ON THE ROLE OF PARTICIPATION CONSTRAINTS^*

Abstract

The impact on vertical contracting of a type‐dependent reservation utility is investigated within a sequential monopolies environment with asymmetric information. The welfare and private properties of contracts controlling both the retail price and the sales level are compared with those restricting only sales. When firms choose contracts non‐cooperatively, retail price restrictions are desirable for the upstream supplier although detrimental to consumers, whenever the retailer reservation utility has a relevant impact on optimal contracts. If this impact is relatively weak and contracts are chosen cooperatively, vertical price control fails to maximize firms' joint‐profit although it would be beneficial to consumers.

Wholesale Pricing with Asymmetric Information about a Private Label*

“…They compare contracts where only sales or sales and the retail price are contractible. Although conceptually related, the specific problem studied by Acconcia et al [2008] differs from the one investigated here. The retailer in their model does not sell a private label so that the firms cannot condition the tariff on its sales, which is central to solving the asymmetric information problem analyzed in the present article.…”

Contractual Design in Agency Problems with Non-Monotonic Cost and Correlated Information

“…This result is rather general and, not surprisingly, it also emerges in other studies on agency problems with countervailing incentives. 1 Principal-agent relationships with ex-post informative signals are examined in another category of contract-theoretic models, pioneered by Riordan and Sappington [19]. 2 In those models, each type of agent is faced with a lottery of proÖts, in addition to being assigned a cost reimbursement.…”

“…The former determine the e §ectiveness of the lottery at extracting the gain in cost reimbursement possibly associated with a fake report; the latter determine the magnitude of that gain. Riordan and Sappington [19] show that the characteristics of the cost are irrelevant, and Örst best is implemented, as long as the vectors of conditional probabilities of the signals are linearly independent across 1 Agengy problems with countervailing incentives to misrepresent information are found in: procurement, when Örms are specialized (Boone and Schottmuller [4]) and when they have a privileged knowledge of the quality of a public signal about their production costs (Che and Sappington [5]); regulation, when the Örm incurs a Öxed cost inversely related with the privately known marginal cost (Lewis and Sappington [14], MRC), with non-linear pricing under price cap (Jullien [11]), when two-product monopolists face complementary demands (Aguirre and Beitia [2]) and when utilities are subject to universal service obligations (Poudou et al [18]); labour and Önancial contracts, when the hidden e §ort exerted by the agent is complementary to his privately known ability in accomplishing the task for the principal (Ollier and Thomas [17]); vertical relationships, when retailers need to specialize some assets before contracting with the upstream suppliers (Acconcia et al [1]); conáicts on investment levels between uninformed shareholders and informed managers (Degryse and de Jong [8]); landowner-farmer contracts with up-front capital endowments (Lewis and Sappington [15]); governmenttaxpayer relationships, when the government wishes to improve the wellbeing of low-skill individuals by taxing high-skill individuals but is aware that the latter will emigrate if the utility they attain within the country is less than the utility they would attain in other jurisdictions (Krause [13]). 2 For instance, in procurement and regulation, information about the productivity or the production cost of the Örm is obtained by observing the behaviour or the market performance of another Örm operating in the same sector in a neighboring economy.…”

Asymmetric information in a bilateral monopoly

“…Vertical contracts refer to contracts that are employed in a vertical production chain, that is between upstream and downstream firms. 1 The interesting thing in the relationship between the parties in the two sectors stressed upon the fact that any action performed by any of them directly affects the profits of the others, that is vertical externalities exist. 2 A common approach it is followed in the literature is that the upstream firms have the bargaining power and they make take-it-or-leave-it offers to the downstream ones.…”