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Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity: Reply

Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity:... By R. PRESTON MCAFEE AND MARIUS SCHWARTZ* Leslie M. Marx and Greg Shaffer (2004) have usefully identified an error in our initial Proposition 2 (McAfee and Schwartz, 1994). In our view, this reveals a serious flaw in our modeling, but does not affect our basic point about the ineffectiveness of nondiscrimination clauses for deterring opportunistic recontracting when contracts involve two-part tariffs or other nonlinear pricing, instead of only per-unit prices. Let us briefly recap our finding. Consider a monopolist input supplier M with constant marginal cost z that can sell to symmetric and imperfectly competitive downstream firms. The monopolist can offer each firm j a two-part tariff contract (rj , fj), where rj is a per-unit price for the input and fj is a fixed fee. Maximizing total industry profits requires selling to n 2 firms (e.g., because their products are differentiated) and, because of their symmetry, at a common price, r* z (r z would be optimal only with a monopolist downstream firm). Given imperfect competition, if all firms accept r* then each earns positive operating profit *. If M could commit to publicly observed offers before downstream competition occurs, it would offer and all would accept http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity: Reply

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References (1)

Publisher
American Economic Association
Copyright
Copyright © 2004 by the American Economic Association
Subject
Shorter Papers
ISSN
0002-8282
DOI
10.1257/0002828041464632
Publisher site
See Article on Publisher Site

Abstract

By R. PRESTON MCAFEE AND MARIUS SCHWARTZ* Leslie M. Marx and Greg Shaffer (2004) have usefully identified an error in our initial Proposition 2 (McAfee and Schwartz, 1994). In our view, this reveals a serious flaw in our modeling, but does not affect our basic point about the ineffectiveness of nondiscrimination clauses for deterring opportunistic recontracting when contracts involve two-part tariffs or other nonlinear pricing, instead of only per-unit prices. Let us briefly recap our finding. Consider a monopolist input supplier M with constant marginal cost z that can sell to symmetric and imperfectly competitive downstream firms. The monopolist can offer each firm j a two-part tariff contract (rj , fj), where rj is a per-unit price for the input and fj is a fixed fee. Maximizing total industry profits requires selling to n 2 firms (e.g., because their products are differentiated) and, because of their symmetry, at a common price, r* z (r z would be optimal only with a monopolist downstream firm). Given imperfect competition, if all firms accept r* then each earns positive operating profit *. If M could commit to publicly observed offers before downstream competition occurs, it would offer and all would accept

Journal

American Economic Review – American Economic Association

Published: Jun 1, 2004

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