Bilateral Control with Vertical Contracts

Abstract

A supplier is known to be subject to opportunism when contracting secretly with downstream competitors, particularly when downstream firms have "passive beliefs." We stress that in many situations, an equilibrium with passive beliefs may not exist and passive beliefs appear less plausible than "wary beliefs", introduced by McAfee and Schwartz, that account for multilateral deviations. We show that in a broad range of situations, equilibria with wary beliefs exist and reflect opportunism. Last, we confirm the insight, derived by O'Brien and Shaffer using a more ad-hoc equilibrium concept, that RPM eliminates the scope for opportunism.Opportunism, Secret Contracts, Beliefs, Resale Price Maintenance