MAGKS Joint Discussion Paper Series in Economics No. 36-2017
This article provides a theoretical model analyzing wholesale pricing tariffs set by a monopolistic manufacturer for its branded product that is sold to final customers by a monopolistic retailer. The bargaining power of the downstream retailer is strengthened by offering also a vertically differentiated private label product whose production costs are known only incompletely to the upstream manufacturer. The model shows that the manufacturer can avoid double marginalization and implement the full information outcome by combining a quantity discount with a market-share discount where only a retailer with a strong private label retroactively receives an allowance. Under these circumstances it is unprofitable for the manufacturer to impose exclusive dealing on the retailer.