Premium
Vertical relations, opportunism, and welfare
Author(s) -
Gaudin Germain
Publication year - 2019
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12272
Subject(s) - opportunism , vertical restraints , microeconomics , competition (biology) , strategic complements , upstream (networking) , business , welfare , industrial organization , resale price maintenance , economics , vertical integration , downstream (manufacturing) , market economy , marketing , incentive , ecology , computer network , computer science , biology
This article revisits the opportunism problem faced by an upstream monopolist contracting with several retailers over secret agreements, when contracts are linear. We characterize the equilibrium under secret contracts and compare it to that under public contracts in a setting allowing for general forms of demand and retail competition. Market distortions are more severe under secret contracts if and only if retailers' instruments are strategic complements. We also investigate the effect of opportunism on firms' profits. Our results remain robust whether retailers hold passive or wary beliefs. We derive some implications for the antitrust analysis of information exchange between firms.