Disclosure Regime and Bargaining in Vertical Markets

Abstract

We endogenize the disclosure decision of vertical contracts under alternative contract types and upstream market structures. We consider that upstream supplier(s) and downstream firms bargain both over the contract terms and the disclosure regime. For a contract to remain secret, both negotiating parties should sign a non-disclosure agreement (NDA). The contract becomes observable, if at least one party refuses to sign an NDA. Under a common upstream supplier and two-part tariff contracts, observability arises in equilibrium. Under wholesale contracts, secrecy may also arise in equilibrium under some circumstances. Under competing vertical chains, no matter what the contract type is, observability always arises in equilibrium. Our welfare analysis indicates that observability maximizes social welfare under any contract type and upstream market structure.