“When Should Manufacturers Want Fair Trade?”: New Insights from Asymmetric Information

We study a specific model of competing manufacturer-retailer pairs where adverse selection and moral hazard are coupled with non-market externalities at the downstream level. In this simple framework we show that a “laissezfaire” approach towards vertical price control might harm consumers as long as privately informed retailers impose non-market externalities on each other. Giving manufacturers freedom to control retail prices harms consumers when retailers impose positive non-market externalities on each other, and the converse is true otherwise. Moreover, in contrast to previous work, we show that, in these instances, consumers’ and suppliers’ preferences over contractual choices are not necessarily aligned.