Econometrica: May 1995, Volume 63, Issue 3

Competing Vertical Structures: Precommitment and Renegotiation<621:CVSPAR>2.0.CO;2-4
p. 621-646

B. Caillaud, B. Jullien, P. Picard

We consider a model where two agents, privately informed about their own characteristics, play a (normal form) game on behalf of two uninformed principals. We analyze the existence of precommitment effects through public announcements of contracts, in a model where agency contracts, designed ex-ante, can always be secretly renegotiated, at the ex-ante and interim stages. We show that the existence of precommitment effects depends both on the strategic complementarity of the agents' actions and on the direct effect of the opponents' actions on each principal's welfare. In our model, the possibility of renegotiation is crucial for the existence of precommitment effects. The results are introduced through an example of Cournot and Bertrand competition between firms, viewed as vertical structures.

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