nep-cta New Economics Papers
on Contract Theory and Applications
Issue of 2018‒03‒05
two papers chosen by
Guillem Roig
University of Melbourne

  1. Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution By Cong Pan;
  2. Bargaining and Hold-up: The Role of Arbitration. By Yannick Gabuthy; Abhinay Muthoo

  1. By: Cong Pan;
    Abstract: I revisit supplier encroachment under the framework of a two-part tariff contract. When a monopoly manufacturer supplies competing retailers and each retailer’s contracting process is unobservable to the rival, the retailer’s lack of knowledge vis-à-vis its rival’s contract may undermine the manufacturer’s commitment power, which prevents the manufacturer from achieving optimal profit. I demonstrate that when the manufacturer directly supplies the resale market, it can use the direct channel as a commitment tool and thus restore its market power. Even though the manufacturer’s encroachment creates more competitors in the resale market, the resultant higher wholesale prices aggravate double marginalization, which may reduce consumer welfare. This result holds even when the manufacturer is very efficient in direct selling.
    Date: 2018–02
  2. By: Yannick Gabuthy; Abhinay Muthoo
    Abstract: This paper presents an “incomplete contracting” model of arbitration. A fundamental notion that underlies our analysis is that it is optimal (in terms of promoting productivity-enhancing, relationship-specific investments) to determine ex-ante – well before arbitration would actually be required (if at all) – whether or not parties would engage the services of an arbitrator in the eventuality that they fail to resolve any disputes by themselves. We embed this idea in a simple model of a long-term relationship between a firm and its workforce, in which they can make (non-contractible) investments, and then negotiate over the division of the resultant surplus, which, if previously agreed, occurs in the shadow of arbitration. We derive several results and insights concerning whether or not it is optimal for the parties to commit to call an arbitrator, in terms of arbitrator-preference and technological parameters.
    Keywords: Arbitration, Non-Contractible Investments, Hold-up, Bargaining.
    JEL: D74 J52 K41
    Date: 2018

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