Channel Competition and Vertical Restraints under Asymmetric Information

Abstract

This paper studies vertical restraints in a duopoly market when retailers have private information on demand uncertainty. If both manufacturers are able to charge their retailers franchise fees, they will delegate the decision to determine retail prices to their retailers. If both manufacturers are unable to charge their retailers franchise fees, the degree of product differentiation plays an important role in equilibrium. If both products are more or less differentiated, both manufacturers will directly set the retail prices without delegation. If both products are extremely homogeneous, there will exist two equilibria; resale price maintenance (RPM) and delegation. From a social welfare standpoint, an efficient equilibrium depends on the degree of product differentiation as well as on the degree of demand uncertainty. If the degree of product differentiation is high, it is efficient for regulators to let manufacturers to be able to employ RPM, irrespective of demand uncertainty. If the degree of product differentiation is at the intermediate level, it is desirable that regulators allow a contract with a franchise fee. If both products are sufficiently homogeneous, it is efficient for regulators to prohibit vertical restraints. This implies that authorities may also realize a desirable equilibrium without vertical restraints.