Asymmetric information in a bilateral monopoly

Apostolis  Pavlou

doi:10.3934/jdg.2016009

Article Contents

2016, Volume 3, Issue 2: 169-189. Doi: 10.3934/jdg.2016009

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Asymmetric information in a bilateral monopoly

Apostolis Pavlou^1,

1.
Charles River Associates (CRA), Avenue Louise 143, 1050, Brussels

Received: January 2016

Revised: March 2016

Published: April 2016

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Abstract

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.

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Mathematics Subject Classification: Primary: 91A28, 91A80.

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