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American Economic Journal: Microeconomics: Vol. 2 No. 1 (February 2010)

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The Strategic Value of Quantity Forcing Contracts

Article Citation

Martimort, David, and Salvatore Piccolo. 2010. "The Strategic Value of Quantity Forcing Contracts." American Economic Journal: Microeconomics, 2(1): 204-29.

DOI: 10.1257/mic.2.1.204

Abstract

We explore the strategic value of quantity forcing contracts in a manufacturer-retailer environment under both adverse selection and moral hazard. Manufacturers dealing with (exclusive) competing retailers may prefer to leave contracts silent on retail prices, whenever other aspects of the retailers' activity remain nonverifiable. Two effects are at play when moving from retail price maintenance to quantity forcing. First, restricting screening possibilities may increase retailers' rent. Second, such a restriction affects downstream competition. This latter effect may justify using quantity forcing contracts and, more generally, shed light on a novel source of contractual incompleteness. (JEL D82, D86, L14)

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Authors

Martimort, David (Toulouse School of Economics and EHESS)
Piccolo, Salvatore (U Naples "Federico II" and CSEF)

JEL Classifications

D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
L14: Transactional Relationships; Contracts and Reputation; Networks

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