Observation of Common Retail Cost under Exclusive Dealing

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.