DP15472 Vertical Contracting with Endogenous Market Structure

Author(s): Marco Pagnozzi, Salvatore Piccolo, Markus Reisinger
Publication Date: November 2020
Keyword(s): asymmetric information, distribution network, opportunism, retail market structure, Vertical contracting
JEL(s): D43, L11, L42, L81
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15472

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.