Opportunism and menus of two-part tariffs

Shaffer, Greg and Marx, L. M. (2004) Opportunism and menus of two-part tariffs. International Journal of Industrial Organization, 22 (10). pp. 1399-1414. ISSN 0167-7187

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Abstract

We show that a menu of two-part tariffs can solve the opportunism problem identified by McAfee and Schwartz (1994) McAfee, R.P., Schwartz, M., 1994. Opportunism in multilateral vertical contracting: nondiscrimination, exclusivity, and uniformity. American Economic Review, 84 210-230 in vertical games with sequential contracting, provided the sunk costs incurred by the first firm to invest are not too large. If the seller were to engage in opportunism with a second firm in an attempt to shift rents from the first firm, the first firm could mitigate the dissipation of its rents by choosing from its menu of contract options the tariff with the higher marginal price and lower fixed fee. The prospect of the first firm's choosing the 'wrong' two-part tariff in the event of opportunism is, in some environments, sufficient to make opportunism unprofitable for the seller. © 2005 Elsevier B.V. All rights reserved.

Item Type: Article
Uncontrolled Keywords: non-contractible investments,sunk costs,vertical contracting
Faculty \ School: Faculty of Social Sciences > Norwich Business School
Related URLs:
Depositing User: Pure Connector
Date Deposited: 23 Sep 2016 23:32
Last Modified: 21 Apr 2020 20:23
URI: https://ueaeprints.uea.ac.uk/id/eprint/59717
DOI: 10.1016/j.ijindorg.2003.11.003

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