Recall that first vertical contract terms are established for the current period (e.
According to this interpretation, an incompatible product design corresponds to an exclusivity clause in a vertical contract.
The vertical contracts are assumed to establish only the relationship-specificity, but not the transfers from a retailer to its upstream supplier.
Before solving this model, I want to emphasize that transfers between retailers and suppliers are determined by Nash bargaining between the two parties, after the vertical contracts are in place.
Of primary interest is the equilibrium degree of relationship-specificity in the vertical contracts and the resulting incentives of retailers to invest in acquiring market share.
held that a
vertical contract between a manufacturer and a retailer establishing the minimum retail price of the product automatically is a "per se" antitrust violation.
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.
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.
This development calls for more research on the analysis of vertical contracts under the wage bargaining model.
Upstream Mergers, Downstream Mergers, and Secret Vertical Contracts," Research in Economics 55, 275-289.
