Data Management

Vertical Separation With Private Contracts

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Executive Summary

The authors 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 (symmetry beliefs), vertical separation by all manufacturers is equilibrium, and it results in higher consumers' prices and manufacturers' profits. Even with private contracts, vertically separated manufacturers reduce competition by inducing less aggressive behavior by retailers in the final market. They characterize a condition for manufacturers' profits to be higher with private than with public contracts.

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