Vertical restraints under asymmetric information: on the role of participation constraints

The impact on vertical contracting of a type-dependent reservation utility is investigated within a sequential monopolies environment with asymmetric information. The welfare and private properties of contracts controlling both the retail price and the sales level are compared with those restricting only sales. When firms choose contracts non-cooperatively, retail price restrictions are desirable for the upstream supplier although detrimental to consumers, whenever the retailer reservation utility has a relevant impact on optimal contracts. If this impact is relatively weak and contracts are chosen cooperatively, vertical price control fails to maximize firms’ joint-profit although it would be beneficial to consumers.