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Journal of Economics

, Volume 103, Issue 2, pp 149–169 | Cite as

Quality distortions in vertical relations

  • Pio BaakeEmail author
  • Vanessa von Schlippenbach
Article

Abstract

This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms’ perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms’ outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.

Keywords

Quality uncertainty Private standards Vertical relations Buyer power 

JEL Classification

D82 L14 L15 

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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  1. 1.Deutsches Institut für Wirtschaftsforschung (DIW)BerlinGermany
  2. 2.Technische UniversitätBerlinGermany
  3. 3.Düsseldorf Institute for Competition Economics (DICE)Universität DüsseldorfDüsseldorfGermany
  4. 4.DIW BerlinBerlinGermany

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