Authors: Pio Baake Vanessa von Schlippenbach
Publish Date: 2011/02/09
Volume: 103, Issue: 2, Pages: 149-169
Abstract
This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm In each period the firms negotiate a delivery contract comprising the quality of the good as well as a nonlinear tariff Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts we show that from the firms’ perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms’ outside options ie the higher their mutual dependency Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes
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