Econometrica: May 1990, Volume 58, Issue 3
Daniel J. SeidmannSuppose that a representative downstream firm must buy relationship-specific capital before trading with an upstream monopolist. Under reasonable conditions the monopolist has an incentive to precommit to its unit price in order to induce its customers to increase their investment, and thereby their demand for the upstream product. Now suppose that the monopolist is privately informed of its unit costs after the downstream firms invest. The monopolist now chooses among contingent contracts, in which price is conditioned on announced costs. We demonstrate that the optimal contract specifies a maximum ("list") price, which is charged for a significant subset of cost realizations, but which may be discounted (to "transactions" prices) when costs are low. The model therefore rationalizes transactions/list pricing: a mode of pricing that is prevalent in interfirm trade. We also use our results to explain why Stigler and Kindahl's medium-term price series tracked the associated Wholesale Price Indices whenever the latter were nondecreasing, but otherwise fell significantly faster.
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