Vertical contracts in search markets
- Author(s)
- Maarten Janssen
- Abstract
This paper studies a simple model to underline the importance of consumer search for understanding wholesale contracts between manufacturers and retailers. The model has one manufacturer and two retailers who compete in a homogeneous goods market where the wholesale contract is unobserved by consumers. If the manufacturer is in the position to offer two-part tariffs, the model without search either does not have an equilibrium wholesale contract (if retailers hold passive beliefs) due to the well-known opportunism problem or it is characterized by the absence of a fixed fee (when retailers hold symmetric beliefs). With consumer search, an equilibrium wholesale contract always exists (even if retailers hold passive beliefs) overcoming the opportunism problem and is always characterized by some fixed fee. If the manufacturer offers linear wholesale contracts, the differences between the models with and without consumer search are less pronounced, but remain even if the search cost vanishes. Thus, the vertical contracting literature cannot simply ignore search costs by saying that they are probably small and can therefore be neglected.
- Organisation(s)
- Department of Economics
- Journal
- International Journal of Industrial Organization
- Volume
- 70
- No. of pages
- 11
- ISSN
- 0167-7187
- DOI
- https://doi.org/10.1016/j.ijindorg.2019.102527
- Publication date
- 08-2019
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502013 Industrial economics, 502021 Microeconomics
- Keywords
- ASJC Scopus subject areas
- Aerospace Engineering, Economics and Econometrics, Economics, Econometrics and Finance (miscellaneous), Industrial relations, Industrial and Manufacturing Engineering, Strategy and Management
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/vertical-contracts-in-search-markets(a2a21563-c516-4375-991f-8cd8b567a352).html