Buybacks eliminate opportunism in vertical contracting
Joao Montez (LBS)
Abstract: A monopolist producer who can secretly negotiate its contracts with competing retailers may be unable to exercise its monopoly power because of the scope for opportunistic behaviour. In this paper we show that the producer can overcome this problem by using individual price ceilings together with buybacks --- a price agreed to be paid by the producer to the retailer for each unit of unsold stock. In the absence of vertical price controls, bilateral buybacks contracts may on their own solve the opportunism problem if the elasticity of demand at the monopoly price is not too small or if the number of retailers is sufficiently large.
Monday 26th March 2012, 17:00 - 18:30, W316
Abstract: A monopolist producer who can secretly negotiate its contracts with competing retailers may be unable to exercise its monopoly power because of the scope for opportunistic behaviour. In this paper we show that the producer can overcome this problem by using individual price ceilings together with buybacks --- a price agreed to be paid by the producer to the retailer for each unit of unsold stock. In the absence of vertical price controls, bilateral buybacks contracts may on their own solve the opportunism problem if the elasticity of demand at the monopoly price is not too small or if the number of retailers is sufficiently large.
Monday 26th March 2012, 17:00 - 18:30, W316