Vertical Restraints, Common Agency, and Information Transmission

Abstract

In many economic situations, manufacturers (upstream producers) may have bet- ter information about market conditions than retailers (downstream producers). Yet, we have a limited understanding about the consequences of such type of information asymmetry in the firm’s pricing decisions and rent distribution along the supply chain. We fill this gap by studying supply chains where the manufacturers have private in- formation and reach the final market through a common or an exclusive retailer. We identify an information transmission effect that creates significant distortions in pricing decisions in a common agency. The distortions vary with the vertical restraint in- strument available. With fixed-fee contracts, a double marginalization problem arises, resulting in higher than collusive prices. With Resale price maintenance, on the other hand, the information transmission interacts with contractual externalities generating a competitive outcome. The results indicate that the manufacturers’ private informa- tion enhances or decreases competition, according to the vertical instrument available. Finally, this analysis shows that Resale price maintenance contracts generate greater welfare than Fixed Fee contracts.