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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 18, No. 1, pp.1-19
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2005
Received 15 Jan 2004 Revised 15 Apr 2005

Observation of Common Retail Cost under Exclusive Dealing

Kojun Hamada
Associate Professor, Faculty of Economics, Niigata University, 8050 Ikarashi 2-no-cho, Niigata, 950-2181, Japan, Tel: +81-25-262-6538, Fax: +81-25-262-6538 khamada@econ.niigata-u.ac.jp

JEL Classification: D43, D82, L13

Abstract

This paper examines whether the manufacturer should observe the common retail cost when exclusively delegating a retailer to sell her goods. We show that the expected sum of profits between the manufacturer and retailer is greater when the former does not observe the cost ex ante than when they do. However, the manufacturer cannot acquire a greater expected private payoff when not observing the cost, regardless of the optimal contract. Even if the commitment to not observe the cost alleviates competition, the manufacturer must always pay higher information rent than the increasing payoff to the retailer.

Keywords:

Contract theory, Exclusive dealing, Retail cost

Acknowledgments

I would like to thank Toshihiko Hayashi, Hideshi Itoh, and Munetomo Ando for their useful comments and suggestions. I would also like to thank the participants at the Summer Seminar of the Contract Theory Workshop (CTW) and the Applied Spatial Economic Workshop held at the University of Tokyo. I thank anonymous referees for helpful comments. The research for this paper is supported by the Grant-in-Aid for Scientific Research (KAKENHI 16730095) from JSPS and MEXT of the Japanese Government. Any remaining errors are mine.

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