Bilateral Control with Vertical Contracts
Volume: Volume 35, No. 4
Issue: Winter 2004
Pages: 728-746
Authors: Patrick Rey and Thibaud Vergé
Title: Bilateral Control with Vertical Contracts
Abstract: A supplier is known to be subject to opportunism when contracting secretly with downstream competitors, particularly when downstream firms have "passive beliefs.'' We stress that in many situations, an equilibrium with passive beliefs may not exist and passive beliefs appear less plausible than "wary beliefs,'' introduced by McAfee and Schwartz (1994). We show that in a broad range of situations, equilibria with wary beliefs exist and reflect opportunism. Last, we confirm the insight, derived by O'Brien and Shaffer (1992) using a more ad hoc equilibrium concept, that resale price maintenance (RPM) eliminates the scope for opportunism.