Working Paper: CEPR ID: DP15472
Authors: Marco Pagnozzi; Salvatore Piccolo; Markus Reisinger
Abstract: We analyze vertical contracting between a manufacturer and retailers who have correlated private information. The manufacturer chooses the number of retailers and secretly contracts with each of them. We highlight a new trade-off between limiting competition and reducing retailers' information rents that shapes the optimal size of the distribution network. We show how the manufacturer's technology and the characteristics of demand affect this distribution network. In contrast to previous literature, we show that the manufacturer may choose a number of retailers that exceeds the socially optimal one, and that vertical integration can raise consumer welfare.
Keywords: Asymmetric Information; Distribution Network; Opportunism; Retail Market Structure; Vertical Contracting
JEL Codes: D43; L11; L42; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| number of retailers (L81) | consumer welfare (D69) |
| manufacturer's decision on the number of retailers (L81) | competition (L13) |
| vertical merger (L22) | opportunism problem (D72) |
| excessive competition (L13) | opportunism problems (D72) |
| asymmetric information (D82) | distribution network size (D85) |
| distribution network size (D85) | retailers' information rents (L81) |
| number of retailers (L81) | manufacturer's profit (L21) |
| market structure (D49) | opportunism problems (D72) |
| number of retailers (L81) | market competition (L13) |