Information exchange through secret vertical contracts

Abstract

This paper studies a stylized common agency problem where two downstream firms, who operate in separated markets and receive private signals about a common demand state, simultaneously offer a secret menu of two-part tariffs contracts to their common supplier. While direct communication is not possible, they may still exchange their information through the use of signal-contingent menus of vertical contracts. We show that a perfect Bayesian equilibrium exists in which information is fully transmitted and the downstream firms obtain nearly first-best industry surplus. Our result suggests that, even in the presence of asymmetric information, efficient collusion with market allocation may not necessitate direct communication as long as firms trade with a common upstream supplier.