Working paper

Signaling quality in vertical relationships

Philippe Bontems, and Philippe Mahenc


This paper addresses the issue of price signaling in a model of vertical relationship between a manufacturer and a retailer who share the same information about quality, unlike consumers who do not observe it a priori. We show that delegating the price setting task to a retailer and controlling it through a vertical contract (two-part tariff) helps drastically reduce the number of price signaling equilibria available to the retailer. The outcome of a unique price charged to consumers obtains without invoking the consumer sophistication usually required by selection criterions. The vertical contract turns to be the most e¢ cient way for the vertical chain to tie its hands on a unique ?nal price. This price may disclose or not information to consumers depending on their initial optimism about quality. We prove that there also exists circumstances where consumers prefer ex ante not to learn the true quality through price.


quality signalling; vertical relationship; information disclosure;

JEL codes

  • D82: Asymmetric and Private Information • Mechanism Design
  • L12: Monopoly • Monopolization Strategies
  • L15: Information and Product Quality • Standardization and Compatibility


Philippe Bontems, and Philippe Mahenc, Signaling quality in vertical relationships, TSE Working Paper, n. 14-467, January 2014.

See also

Published in

TSE Working Paper, n. 14-467, January 2014