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“When Should Manufacturers Want Fair Trade?”: New Insights from Asymmetric Information when Supply Chains Compete
Author(s) -
Kastl Jakub,
Martimort David,
Piccolo Salvatore
Publication year - 2011
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2011.00300.x
Subject(s) - adverse selection , externality , monopoly , converse , harm , information asymmetry , moral hazard , business , supply chain , control (management) , microeconomics , economics , incentive , industrial organization , private information retrieval , marketing , geometry , mathematics , management , political science , law , statistics
We study a model of competing manufacturer/retailer pairs where adverse selection and moral hazard are coupled with promotional externalities at the downstream level. In contrast to earlier models mainly focusing on a bilateral monopoly setting, we show that with competing brands a ‘laissez‐faire’ approach towards vertical price control might not always promote productive efficiency. Giving manufacturers freedom to control retail prices is more likely to harm consumers when retailers impose positive promotional externalities on each other, and the converse is true otherwise. Our simple model also suggests that, with competing supply chains, consumers and manufacturers might prefer different contractual modes if promotional externalities have substantial effects on demands.