Vertical Contracting with Endogenous Market Structure
Marco Pagnozzi, Salvatore Piccolo and Markus Reisinger
Abstract: A manufacturer chooses the optimal retail market structure and secretly contracts with each (homogeneous) retailer. With complete information, the manufacturer uses a single retailer to eliminate the opportunism problem. When retailers are privately informed about their (common) marginal cost, however, the number of retailers also affects their information rents and the manufacturer may prefer an oligopolistic market structure. We show how the manufacturer’s technology and the characteristics of demand affect the number of retailers. Our results arise with both price and quantity competition, with different retailers’ beliefs, and also with imperfectly correlated costs. Surprisingly, in our environment vertical integration may improve consumer surplus.