Marco Pagnozzi (Università di Napoli "Federico II")

joint with Salvatore Piccolo and Markus Reisinger

A manufacturer chooses the optimal size of her retail network and bilaterally and secretly contracts with each retailer. In a classic framework without asymmetric information, the manufacturer forecloses the downstream market in order to eliminate the opportunism problem. When retailers are privately informed about their (common) marginal cost, however, the size of the retail network also affects retailers' information rents. The manufacturer may prefers to sell through multiple retailers in order to exploit the disciplining effect of downstream competition. We also show how the manufacturer's technology, the elasticity of final demand, and the size of the market affect the choice of the retail network. Our results arise both with price and quantity competition, and also when retailers' costs are imperfectly correlated.