Corresponding author: Marco Pagnozzi, Department of Economics, Università di Napoli Federico II, Via Cintia, 80126 Napoli, Italy. Email: email@example.com.
Vertical Separation with Private Contracts*
Article first published online: 2 NOV 2011
© 2011 The Author(s). The Economic Journal © 2011 Royal Economic Society
The Economic Journal
Volume 122, Issue 559, pages 173–207, March 2012
How to Cite
Pagnozzi, M. and Piccolo, S. (2012), Vertical Separation with Private Contracts. The Economic Journal, 122: 173–207. doi: 10.1111/j.1468-0297.2011.02471.x
We thank Fabrizio Adriani, In-Uck Park, Elisabetta Iossa, Marco LiCalzi, Meg Meyer, Volker Nocke, David Myatt and two anonymous referees for extremely helpful comments. We also thank seminar audiences at the University of Bristol, IMT Lucca, Politecnico di Torino, CERGE-EI Prague, the 2010 EARIE conference, the 2011 CSEF-IGIER Symposium and the 2011 EEA-ESEM Congress.
- Issue published online: 5 MAR 2012
- Article first published online: 2 NOV 2011
- Submitted: 19 July 2010 Accepted: 18 June 2011
We consider a manufacturer's incentive to sell through an independent retailer, rather than directly to final consumers, when contracts with retailers cannot be observed by competitors. If retailers conjecture that identical competing manufacturers always offer identical contracts (symmetric beliefs), manufacturers choose vertical separation in equilibrium. Even with private contracts, vertically separated manufacturers reduce competition and increase profits by inducing less aggressive behaviour by retailers in the final market. Manufacturers’ profits may be higher with private than with public contracts. Our results hold both with price and with quantity competition and do not hinge on retailers’ beliefs being perfectly symmetric. We also discuss various justifications for symmetric beliefs, including incomplete information.