Recall that first vertical contract
terms are established for the current period (e.g., wholesale prices and franchise fees) and then retailers attract customers, taking as given the wholesale price they have bargained with their manufacturing partner.
So even basic cereals are now being produced for specialized use for further processing, on a vertical contract
Detailed case studies of firms' dealer arrangements before and after the change, including data on sales, prices, other vertical contract
terms, the structure of manufacturer pricing, and other marketing expenditures, would provide important insights into the effects and substitutability of RPM and other practices.
Hastings asks how much, if any, of the differences in retail gasoline prices between markets is attributable to differences in the composition of vertical contract
types at gasoline stations in each market.
Further, it is likely that vertical contracts
between insurers and body shops reduce the instance of insurance fraud.
The overall welfare effects of vertical integration or these substitute nonstandard vertical contracts
when there is market power upstream and input-substitution possibilities downstream are positive, although the effect on consumer prices is ambiguous when the downstream market is competitive.
For example, more liquid aircraft are more redeployable and should then have longer financing contracts (as in Shleifer and Vishny, 1992), but are also less specific and should then have shorter vertical contracts
(as in Williamson, 1979).
"Under vertical contracts
, the processor owns the product in production, while the contractee generally furnishes the labor and facilities for production.
Fumagalli and Motta (2001) consider an industry characterized by secret vertical contracts
, and examine a benchmark case where there are two vertical chains, in which two upstream manufacturers sell to two downstream retailers, thereby demonstrating that a downstream merger is more welfare detrimental than an upstream merger.