September 16, 2019, 14:00–15:30
Industrial Organization seminar
We analyze vertical contracting between a manufacturer and retailers who have correlated private information. The manufacturer chooses the retail market structure and secretly contracts with each retailer. We highlight a new trade-off between the manufacturer's goal to limit downstream competition and reduce retailer's information rent. This trade-off shapes the size of the retail network, thus affecting the welfare evaluation of distribution structures. Contrary to previous literature, vertical integration can improve consumer surplus. We also consider different beliefs by retailers about the contracts offered to rivals and show how they affect the market outcome.