Vertical Restraints in a Model of Vertical Differentiation.

The authors consider the case of a manufacturer who sells a homogeneous good to retailers who compe te in prices and "cum-sales" or "post-sales" services. They show that the optimal linear-price contract is inefficient from the point of view of the vertical structure and that simple forms of vertical r estraints, such as resale price maintenance and franchise fees, domin ate the optimal linear-price contract, but do not restore vertical ef ficiency. Their analysis is concluded with the description of an effi cient contract. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.