Supplier Encroachment Under a Two-Part Tariff Contract and Unobservable Multilateral Contracting

Abstract

We revisit supplier encroachment under the framework of a two-part tariff contract. Early literature largely concludes that an upstream manufacturer offering a two-part tariff contract never sells directly to the resale market because it can always extract the downstream retailer’s entire surplus through the fixed fee. However, in our study, when a monopoly manufacturer supplies competing retailers and contract outcomes are observable only to the contracting partners, the manufacturer with a two-part tariff contract encroaches upon the resale market and enhances profits. We further show that this encroachment aggravates double marginalization and reduces consumer welfare and the total surplus.