Disclosure Regime and Bargaining in Vertical Markets

Abstract

We consider the strategic implications of the disclosure regime of vertical contract terms by endogenizing them. The latter are exogenously set in the literature either as observable or as secret. By endogenizing the disclosure regime we show that the mode and intensity of the downstream competition, as well as the upstream market structure, play a significant role in the observability of the vertical contract terms. On the contrary, this decision is independent of the bargain power distribution or the product differentiation. When a common supplier bargains with each retailer over a two-part tariff contract, interim observability intensifies the commitment problem, by offering a wholesale price below the marginal cost. The same holds under linear contracts or Bertrand competition. On the other hand, under dedicated suppliers, it is more profitable to bargain over interim unobservable contracts and through them to alleviate the commitment problem. Policymakers could increase the social welfare by encouraging interim observability (unobservability) when firms compete in quantities (prices). Monopolized upstream markets are more prone to have aligned incentives with the policymakers, especially if the downstream retailers compete over quantities.

Keywords: Bilateral Contracting, Vertical Relations, Two–Part Tariffs, Bargaining, Contract’s Disclosure

JEL Classification: D43, L13, L14