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Keywords:

  • optimal contracts;
  • competition;
  • retail channels;
  • asymmetric retailers

I consider a channel with one manufacturer selling the same product to two retailers engaged in imperfect competition. The retailers are asymmetric because one has a lower marginal selling cost (or a higher demand potential) than the other. I design the manufacturer's optimal selling mechanism, whereby the manufacturer must offer the same contract options to both retailers. I fully characterize the manufacturer's optimal selling mechanism for varying degrees of retailer asymmetry and competition intensity. I find that under certain conditions, the manufacturer is better off selling a larger quantity through the high-cost (or low-demand potential) retailer. I also show how the optimal mechanism can be implemented using a menu of two-part tariffs with quantity controls.