Vertical Price Restraints and Free Entry Under Asymmetric Information*

Abstract

In a vertically related market where the number of manufacturer‐retailer hierarchies is endogenously determined by free entry, we investigate the impact of vertical price restraints on the free‐entry equilibrium and its welfare properties under asymmetric information within each supply hierarchy. We compare the legal regimes of laissez‐faire and ban on resale price maintenance (RPM) under different entry decision modes. Under upstream entry, laissez‐faire generates higher entry and increases consumer surplus, but a ban on RPM enhances total welfare. Socially excessive entry occurs under both legal regimes, and the entry bias declines with the severity of the asymmetric information problem. Conversely, under downstream entry, a ban on RPM stimulates entry and consumer surplus, but laissez‐faire can be total welfare superior. Our results provide antitrust policy implications about vertical price control.

Informational rents and the excessive entry theorem: The case of hidden action*

“…Therefore, asymmetric information gives rise to rents in the context of a free-entry Cournot oligopoly. In contrast to our setting with asymmetric information, in Bonazzi et al (2021), rents emerge because of imperfectly competitive markets for the products sold from upstream to downstream firms. Moreover, all agents pursue the same objective.…”

“…This is the so‐called business creation effect (Basak & Mukherjee, 2016; Ghosh & Morita, 2007a), which is analytically equivalent to the impact of a rent payment and sometimes also interpreted in this way (see Antelo & Bru, 2006; Ghosh & Morita, 2007a). Bonazzi et al (2021) provide a micro‐foundation for the inability of the upstream firm to extract all the downstream firms' surpluses by assuming that the latters' profits depend on unobservable effort and the realization of a demand parameter. They show that limitations on the upstream firms' pricing behavior influence the magnitude of rent payments and thereby the extent of entry.…”

Vertical Contracts and Downstream Entry*

“…The recent papers byPagnozzi et al [2021] andBonazzi et al [2022] analyze the choice of distribution channels by upstream firms with a focus on the role of asymmetric information and not of the contractual forms that we consider here.© 2023 The Authors. The Journal of Industrial Economics published by The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd.…”