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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 136:
Unobservable Vertical Restraints and Interbrand Competition

Yeongjae Kang

Abstract: This paper presents a model of vertical restraints with unobservable contracts in a market where retailers compete in price and service. The equilibrium contracts under the franchise and the resale price maintenance arrangements are shown to differ in the way they lessen competition between retailers. The franchise contract is more effective for lessening competition in price while the RPM for collusion in service. Consequently, the equilibrium of the manufacturers’ vertical restraint selection game depends on the nature of their strategic interaction. An increase in retailer’s risk aversion and/or demand uncertainty favors RPM

Keywords: Vertical restraint; unobservable contract; risk aversion; (follow links to similar papers)

JEL-Codes: D43; L13; (follow links to similar papers)

25 pages, November 1996

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