'When Should Manufacturers Want Fair Trade?': New Insights from Asymmetric Information When Supply Chains Compete

29 Pages Posted: 24 Jul 2011

See all articles by Jakub Kastl

Jakub Kastl

Stanford University

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Salvatore Piccolo

Catholic University of the Sacred Heart of Milan

Date Written: Fall 2011

Abstract

We study a model of competing manufacturer/retailer pairs where adverse selection and moral hazard are coupled with promotional externalities at the downstream level. In contrast to earlier models mainly focusing on a bilateral monopoly setting, we show that with competing brands a ‘laissez‐faire’ approach towards vertical price control might not always promote productive efficiency. Giving manufacturers freedom to control retail prices is more likely to harm consumers when retailers impose positive promotional externalities on each other, and the converse is true otherwise. Our simple model also suggests that, with competing supply chains, consumers and manufacturers might prefer different contractual modes if promotional externalities have substantial effects on demands.

Suggested Citation

Kastl, Jakub and Martimort, David and Piccolo, Salvatore, 'When Should Manufacturers Want Fair Trade?': New Insights from Asymmetric Information When Supply Chains Compete (Fall 2011). Journal of Economics & Management Strategy, Vol. 20, Issue 3, pp. 649-677, 2011. Available at SSRN: https://ssrn.com/abstract=1893357 or http://dx.doi.org/10.1111/j.1530-9134.2011.00300.x

Jakub Kastl (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

David Martimort

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 5 6112 8614 (Phone)
+33 5 6112 8637 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Salvatore Piccolo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

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