Patrick Rey (Toulouse School of Economics) on "Secret Contracting and Interlocking Relationships"

In a model where differentiated suppliers deal with the same differentiated downstream firms, we analyse secret bilateral contracting and the effect of various vertical restraints. In the absence of any restraint, contract equilibria all involve cost-based tariffs and thus rather competitive retail prices. When firms can decide with which partners to deal before negotiating contracts, we show that interlocking relationships constitute the unique coalition-proof Nash equilibrium when retailers are sufficiently differentiated. Otherwise, manufacturers supply to different retailers (i.e., exclusive dealing arises in equilibrium). We then show that price parity clauses (retail MFNs) do not affect the equilibrium outcome but that RPM may lead to less competitive equilibria. Our setting also allows us to analyse agency relationships, assuming that suppliers keep control of the retail prices charged on different distribution platforms.