Friends do Matter: Strategic Uncertainty and Vertical Contractual Relations.

In the literature on vertical relations little attention has been paid to the tole of strategic uncertainty, that is, the presence of multiple self-enforcing outcomes which might lead to coordination failure. However, if firms have some degree of freedom in designing the industrial relations they engage, alternative solutions, in the form of vertical contracts, are possible. A game-theoretic model is provided to show how some of the most popular forms of vertical contractual relations can be derived as equilibria of multi-stage game in which firms bargain over their reciprocal control, in order to minimize the inefficiency created by strategic uncertainty.