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April  2016, 3(2): 169-189. doi: 10.3934/jdg.2016009

Asymmetric information in a bilateral monopoly

Apostolis Pavlou 1,

1. 

Charles River Associates (CRA), Avenue Louise 143, 1050, Brussels, Belgium

Received  January 2016 Revised  March 2016 Published  April 2016

This paper explores the role of the asymmetry in information in business to business (B2B) transactions. In a vertical setting with successive monopolies we present the equivalence that holds under complete information, that is, the profitability of the powerful party does not depend on its position in the industry and we investigate how potential information advantages affect this relationship. We demonstrate that under asymmetric information this equivalence breaks down and a firm that is positioned in the downstream sector reduces more effectively the information rents that it has to sacrifice for a truthful reporting, but the consumers remain indifferent. Under wholesale price contracts consumers prefer the less informed party to be at the downstream level since the excessive pricing distortion is less intense. Moreover, if second degree of price discrimination is not allowed then the principal prefers to be at the upstream level of production and consumers are better off in this case which comes in contrast to our previous results.
Keywords: vertical relations, two-part tariff, Asymmetric information, screening, wholesale price..
Mathematics Subject Classification: Primary: 91A28, 91A8.
Citation: Apostolis Pavlou. Asymmetric information in a bilateral monopoly. Journal of Dynamics & Games, 2016, 3 (2) : 169-189. doi: 10.3934/jdg.2016009
References:
[1]

A. Acconcias, R. Martina and S. Piccolo, Vertical restraints under asymmetric information: On the role of participation constraints, The Journal of Industrial Economics, 56 (2008), 379-401. doi: 10.1111/j.1467-6451.2008.00345.x.  Google Scholar

[2]

D. Baron and R. Myerson, Regulating a monopolist with unknown costs, Econometrica, 50 (1982), 911-930. doi: 10.2307/1912769.  Google Scholar

[3]

F. B. Blair and T. R. Lewis, Optimal retail contracts with asymmetric information and moral hazard, Rand Journal of Economics, 25 (1994), 284-296. Google Scholar

[4]

P. Bolton and M. Dewatripont, Contract Theory, MIT Press, 2005. Google Scholar

[5]

Z. Chen, Dominant retailers and the countervailing power hypothesis, Rand Journal of Economics, 34 (2003), 612-625. Google Scholar

[6]

Z. Chen, Buyer power: Economic theory and antitrust policy, Research in Law and Economics, 22 (2007), 17-40. doi: 10.1016/S0193-5895(06)22002-5.  Google Scholar

[7]

C. J. Corbett, D. Zhou and C. S. Tang, Designing supply contracts: Contract type and information asymmetry, Management Science, 50 (2004), 550-559. Google Scholar

[8]

K. J. Crocker, Vertical integration and the strategic use of private information, The Bell Journal of Economics, 14 (1983), 236-248. doi: 10.2307/3003550.  Google Scholar

[9]

E. Gal-Or, Vertical restraints with incomplete information, The Journal of Industrial Economics, 39 (1991), 503-516. doi: 10.2307/2098458.  Google Scholar

[10]

F. Herweg and D. Muller, Price discrimination in input markets: Quantity discounts and private information, The Economic Journal, 124 (2014), 776-804. doi: 10.1111/ecoj.12061.  Google Scholar

[11]

R. Inderst and N. Mazzarotto, Buyer power in distribution, chapter prepared for the ABA Antitrust Section Handbook, Issues in Competition Law and Policy (2006) (W.D. Collins, ed., in preparation). Google Scholar

[12]

B. Julien, Participation constraints in adverse selection models, Journal of Economic Theory, 93 (2000), 1-47. doi: 10.1006/jeth.1999.2641.  Google Scholar

[13]

J. J. Laffont and D. Martimort, The Theory of Incentives: The Principal-Agent Model, Princeton University Press, 2002. Google Scholar

[14]

D. Martimort and S. Piccolo, Resale price maintenance under asymmetric information, International Journal of Industrial Organization, 25 (2007), 315-339. doi: 10.1016/j.ijindorg.2006.04.015.  Google Scholar

[15]

F. Mathewson and R. Winter, An economic theory of vertical restraints, Rand Journal of Economics, 15 (1987), 27-38. Google Scholar

[16]

C. Milliou, E. Petrakis and N. Vettas, (In)efficient trading forms in competing vertical chains, mimeo, 2008. Google Scholar

[17]

M. Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004. doi: 10.1017/CBO9780511804038.  Google Scholar

[18]

R. Myerson, Incentive Compatibility and the Bargaining Problem, Econometrica, 47 (1979), 61-73. doi: 10.2307/1912346.  Google Scholar

[19]

P. Rey and J. Tirole, The logic of vertical restraints, American Economic Review, 76 (1986), 921-939. Google Scholar

[20]

B. Salanié, The Economics of Contracts: A Primer, MIT Press, 2005. Google Scholar

[21]

J. Spengler, Vertical integration and antitrust policy, Journal of Political Economy, 58 (1950), 347-352. doi: 10.1086/256964.  Google Scholar

[22]

L. Telser, Why should manufacturers want fair trade?, Journal of Law and Economics, 3 (1960), 86-105. Google Scholar

[23]

J. Tirole, The Theory of Industrial Organization, MIT Press, 1988. Google Scholar

show all references

References:
[1]

A. Acconcias, R. Martina and S. Piccolo, Vertical restraints under asymmetric information: On the role of participation constraints, The Journal of Industrial Economics, 56 (2008), 379-401. doi: 10.1111/j.1467-6451.2008.00345.x.  Google Scholar

[2]

D. Baron and R. Myerson, Regulating a monopolist with unknown costs, Econometrica, 50 (1982), 911-930. doi: 10.2307/1912769.  Google Scholar

[3]

F. B. Blair and T. R. Lewis, Optimal retail contracts with asymmetric information and moral hazard, Rand Journal of Economics, 25 (1994), 284-296. Google Scholar

[4]

P. Bolton and M. Dewatripont, Contract Theory, MIT Press, 2005. Google Scholar

[5]

Z. Chen, Dominant retailers and the countervailing power hypothesis, Rand Journal of Economics, 34 (2003), 612-625. Google Scholar

[6]

Z. Chen, Buyer power: Economic theory and antitrust policy, Research in Law and Economics, 22 (2007), 17-40. doi: 10.1016/S0193-5895(06)22002-5.  Google Scholar

[7]

C. J. Corbett, D. Zhou and C. S. Tang, Designing supply contracts: Contract type and information asymmetry, Management Science, 50 (2004), 550-559. Google Scholar

[8]

K. J. Crocker, Vertical integration and the strategic use of private information, The Bell Journal of Economics, 14 (1983), 236-248. doi: 10.2307/3003550.  Google Scholar

[9]

E. Gal-Or, Vertical restraints with incomplete information, The Journal of Industrial Economics, 39 (1991), 503-516. doi: 10.2307/2098458.  Google Scholar

[10]

F. Herweg and D. Muller, Price discrimination in input markets: Quantity discounts and private information, The Economic Journal, 124 (2014), 776-804. doi: 10.1111/ecoj.12061.  Google Scholar

[11]

R. Inderst and N. Mazzarotto, Buyer power in distribution, chapter prepared for the ABA Antitrust Section Handbook, Issues in Competition Law and Policy (2006) (W.D. Collins, ed., in preparation). Google Scholar

[12]

B. Julien, Participation constraints in adverse selection models, Journal of Economic Theory, 93 (2000), 1-47. doi: 10.1006/jeth.1999.2641.  Google Scholar

[13]

J. J. Laffont and D. Martimort, The Theory of Incentives: The Principal-Agent Model, Princeton University Press, 2002. Google Scholar

[14]

D. Martimort and S. Piccolo, Resale price maintenance under asymmetric information, International Journal of Industrial Organization, 25 (2007), 315-339. doi: 10.1016/j.ijindorg.2006.04.015.  Google Scholar

[15]

F. Mathewson and R. Winter, An economic theory of vertical restraints, Rand Journal of Economics, 15 (1987), 27-38. Google Scholar

[16]

C. Milliou, E. Petrakis and N. Vettas, (In)efficient trading forms in competing vertical chains, mimeo, 2008. Google Scholar

[17]

M. Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004. doi: 10.1017/CBO9780511804038.  Google Scholar

[18]

R. Myerson, Incentive Compatibility and the Bargaining Problem, Econometrica, 47 (1979), 61-73. doi: 10.2307/1912346.  Google Scholar

[19]

P. Rey and J. Tirole, The logic of vertical restraints, American Economic Review, 76 (1986), 921-939. Google Scholar

[20]

B. Salanié, The Economics of Contracts: A Primer, MIT Press, 2005. Google Scholar

[21]

J. Spengler, Vertical integration and antitrust policy, Journal of Political Economy, 58 (1950), 347-352. doi: 10.1086/256964.  Google Scholar

[22]

L. Telser, Why should manufacturers want fair trade?, Journal of Law and Economics, 3 (1960), 86-105. Google Scholar

[23]

J. Tirole, The Theory of Industrial Organization, MIT Press, 1988. Google Scholar

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