Publication: Disclosure regime of contract terms and bargaining in vertical markets
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2022-02-16
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Abstract
We consider a vertically related market where an upstream monopolist supplies two downstream Cournot competitors. We allow the vertical contract terms to be either interim observable or secret. We address a dichotomy in the literature by endogenizing the disclosure regime of contract terms. The latter could be set via a Non-Disclosure Agreement. Firms bargain over both the disclosure regime and the contract terms.
Our results indicate that when firms trade over two-part tariffs, universal interim observability is the unique equilibrium no matter the bargaining power distribution or the product differentiation. Yet, when firms trade over linear tariffs there may be a multiplicity of equilibria. We also show that under competing vertical chains we get universal interim observability as a unique equilibrium no matter the upstream
structure. Our results qualitatively hold under Bertrand competition too. Our welfare analysis indicates that universal interim observability and two-part tariffs yield the highest consumer surplus and total welfare.
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Bilateral Contracting, Vertical Relations, Two-Part Tariffs, Bargaining, Nondisclosure Agreements, Secret Contracts