Buyer Power and Intraband Coordination
We analyze the competitive effects of vertical contracts in a contracting situation where rival retailers offer contracts to a manufacturer. In contrast to Bernheim and Whinston (1998), who study the situation in which competing manufacturers offer contracts to a common retailer, we find that two-part tariffs (even if contingent on exclusivity or not) do not suffice to implement the monopoly outcome. Richer arrangements (including, e.g., conditional fixed fees and upfront payments) are thus required to internalize all contracting externalities. The welfare implications are ambiguous. On the one hand, richer contracts ensure that no efficient retailer is excluded. On the other hand, they allow firms to maintain monopoly prices despite intrabrand competition. Simulations suggest that the latter effect may be more significant.
Keywords: Vertical contracts, buyer power, common agency
JEL classification codes: L14, L42.