Partial secrecy in vertical contracting

Abstract

This paper introduces a notion of partial secrecy in bilateral contracting games between one upstream firm and several competing downstream firms. The supplier’s offer quantities are subject to trembles, and each downstream firm observes a noisy signal about the offer received by its competitor before deciding whether to accept its offer. A downstream firm’s belief about its competitor’s quantity is determined endogenously as a weighted average of the competitor’s expected equilibrium quantity and the signal about the actual quantity that the competitor was offered. The degree of contract secrecy is captured by the weight that this belief puts on the competitor’s expected equilibrium quantity. We find that a higher degree of secrecy implies a more competitive equilibrium outcome, both in a game with simultaneous offers and in a dynamic game with alternating offers similar to the one in Do and Miklós-Thal (2022, “Opportunism in Vertical Contracting: A Dynamic Perspective,” CEPR Discussion Paper No. DP16951).