Opportunism and menus of two-part tariffs

We show that a menu of two-part tariffs can solve the opportunism problem identified by McAfee and Schwartz (1994) McAfee, R.P., Schwartz, M., 1994. Opportunism in multilateral vertical contracting: nondiscrimination, exclusivity, and uniformity. American Economic Review, 84 210-230 in vertical games with sequential contracting, provided the sunk costs incurred by the first firm to invest are not too large. If the seller were to engage in opportunism with a second firm in an attempt to shift rents from the first firm, the first firm could mitigate the dissipation of its rents by choosing from its menu of contract options the tariff with the higher marginal price and lower fixed fee. The prospect of the first firm's choosing the 'wrong' two-part tariff in the event of opportunism is, in some environments, sufficient to make opportunism unprofitable for the seller. © 2005 Elsevier B.V. All rights reserved.