Igor Muraviev (International College of Economics & Finance, Moscow), “Upfront Payment, Renegotiation and (Mis)coordination in Multilateral Vertical Contracting”, Agricultural and Food Industrial Organization Seminar, Toulouse : TSE, September 26, 2011, 11:00–12:30, room MF 323.
The paper analyzes the competitive effects of vertical contracts in a situation where competition exists both upstream and downstream, and both sides have balanced and differentiated bargaining power. It devel- ops the framework of sequential bilateral negotiations between two rival manufacturers and two competing retailers with only one manufacturer negotiating with both retailers and conversely only one retailer negotiating with both manufacturers. It finds that when the supply contracts consist of three-part tariffs (i.e., upfront payments and quantity discounts) and can be renegotiated (from scratch) at any time before retail competition takes place, firms fail to maximize their total profits. The paper also shows that, while the manufacturer dealing with both retailers may use upfront fees as a tool to dampen intrabrand competition, the other dealing with one retailer only may use it as a means to compensate for the negative impact of the sales of its product on the total profits from selling its rival's one. The results contrast with those obtained when competi- tion exists at one level only: in a similar contracting environment firms could sustain monopoly prices and, if only a single, common retailer were available, neither manufacturer would need to pay upfront.