Vertical Contract Disclosure in Three-Tier Industries

Abstract

Consider a three-tier industry with a monopolist supplying an essential input to a manufacturer, which in turn sells its product to final consumers through two differentiated retailers. Throughout the supply chain, contracts are linear and secret. In this setting, upon receiving an out-of-equilibrium offer by the manufacturer, a retailer has to form a belief about the identity of the deviating upstream firm. This beliefs' specification problem wipes out if an Open Book Accounting (OBA) policy is implemented (i.e., if the input price is disclosed to the retailers). I show that the welfare effects of OBA crucially depend on the retailers' beliefs: when retailers compete a la Cournot, OBA increases total industry profit and consumer surplus if and only if retailers believe that any out-of-equilibrium offer is more likely to reflect a deviation by the upstream supplier rather than by the manufacturer, whereas the opposite result emerges under Bertrand competition.