Vertical Separation with Private Contracts

35 Pages Posted: 6 Mar 2012

See all articles by Marco Pagnozzi

Marco Pagnozzi

Università di Napoli Federico II; CSEF

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Date Written: March 2012

Abstract

We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetric beliefs), manufacturers choose vertical separation in equilibrium. Even with private contracts, vertically separated manufacturers reduce competition and increase profits by inducing less aggressive behaviour by retailers in the final market. Manufacturers’ profits may be higher with private than with public contracts. Our results hold both with price and with quantity competition and do not hinge on retailers’ beliefs being perfectly symmetric. We also discuss various justifications for symmetric beliefs, including incomplete information.

Suggested Citation

Pagnozzi, Marco and Piccolo, Salvatore, Vertical Separation with Private Contracts (March 2012). The Economic Journal, Vol. 122, Issue 559, pp. 173-207, 2012, Available at SSRN: https://ssrn.com/abstract=2016721 or http://dx.doi.org/10.1111/j.1468-0297.2011.02471.x

Marco Pagnozzi

Università di Napoli Federico II ( email )

Department of Economics
Via Cinthia (Monte S. Angelo)
Napoli, 80126
Italy
+39 081 675099 (Phone)
+39 081 7663540 (Fax)

HOME PAGE: http://www.csef.it/people/pagnozzi.htm

CSEF

Italy

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
24127
Bergamo, BG 24127
Italy

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