Entry and product variety with competing supply chains

We study a model where an endogenous number of competing manufacturers located around a circle contract with exclusive retailers who are privately informed about their costs. The number of brands in the market (determined by the manufacturers’ zero profit condition) depends on the presence of asymmetric information and on the types of contracts between manufacturers and retailers. With two-part tariffs, wholesale prices fully reflect retailers’ costs; with linear contracts, wholesale prices are constant and independent of retailers’ costs. The number of brands is lower (resp. higher) with asymmetric information than with complete information when contracts are linear (resp. with two-part tariffs). Moreover, although the number of brands is always higher with linear contracts than with two-part tariffs, joint profits of manufacturers and retailers are higher with linear prices. We also discuss manufacturers’ incentives to choose different contract forms and analyze the effects of endogenous entry on welfare.