Private and Social Incentives for Vertical Contract Disclosure

Abstract

We follow the framework in Arya and Mittendorf's 2011 Rand Journal of Economics paper but extend their analysis by investigating supplier(s)' equilibrium choices of disclosure or confidentiality regarding their contract terms with the downstream retailers. In the case of a common supplier, we find that the unique subgame perfect Nash equilibrium (SPNE) is for the supplier to choose disclosure. This private incentive is opposite to social incentive, which calls for the regulator to choose confidentiality. In the case of dedicated suppliers, however, there are multiple SPNE due to coordination issues between the suppliers. The case which maximizes social surplus – disclosure – can be supported as a SPNE, together with the case of confidentiality, which maximizes supplier profits at the cost of everyone else. Copyright © 2014 John Wiley & Sons, Ltd.