Abstract

We study a common agency problem in which two downstream firms, who are localmonopolists and receive private demand signals, offer secret menus of two-part tar-iff contracts to their common supplier. While direct communication is not possible,they may still exchange their information through signal-contingent menus of verticalcontracts. We show that a perfect Bayesian equilibrium exists in which information istransmitted, and downstream firms obtain nearly the first-best industry surplus. Theuse of both fixed charges and slotting fees is necessary for such a result. Our analysisprovides a novel explanation for the use of slotting fees in vertical contracting basedon its value as an information transmission device.