Entry and Product Variety with Competing Supply Chains

37 Pages Posted: 26 Sep 2016

See all articles by Marco Pagnozzi

Marco Pagnozzi

Università di Napoli Federico II; CSEF

Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF

Matteo Bassi

Competition and Markets Authority (CMA)

Date Written: September 2016

Abstract

We study a model where an endogenous number of competing manufacturers located around a circle contract with exclusive retailers who are privately informed about their costs. The number of brands in the market (determined by the manufacturers’ zero profit condition) depends on the presence of asymmetric information and on the types of contracts between manufacturers and retailers. With two‐part tariffs, wholesale prices fully reflect retailers’ costs; with linear contracts, wholesale prices are constant and independent of retailers’ costs. The number of brands is lower (resp. higher) with asymmetric information than with complete information when contracts are linear (resp. with two‐part tariffs). Moreover, although the number of brands is always higher with linear contracts than with two‐part tariffs, joint profits of manufacturers and retailers are higher with linear prices. We also discuss manufacturers’ incentives to choose different contract forms and analyze the effects of endogenous entry on welfare.

Suggested Citation

Pagnozzi, Marco and Piccolo, Salvatore and Bassi, Matteo, Entry and Product Variety with Competing Supply Chains (September 2016). The Journal of Industrial Economics, Vol. 64, Issue 3, pp. 520-556, 2016, Available at SSRN: https://ssrn.com/abstract=2842851 or http://dx.doi.org/10.1111/joie.12107

Marco Pagnozzi (Contact Author)

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)

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CSEF

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Salvatore Piccolo

University of Bergamo, Compass Lexecon and CSEF ( email )

via de caniana 2
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Bergamo, BG 24127
Italy

Matteo Bassi

Competition and Markets Authority (CMA) ( email )

Victoria House
37 Southampton Row
London, WC1B 4AD
United Kingdom

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