A Two-Sided Entry Model under Manufacturer and Retailer Contracts

This paper studies a class of entry model where entry decisions involve multiple participants and contractual agreements. We use a unique dataset from the women clothing category in a department store to estimate a structural two-sided entry model, allowing for information asymmetry between manufacturers and the store. We study the economic determinants for the entry and the contractual agreement regarding the division of sales revenue. Our results show that the entry of a brand can generate important spill-overs on the sales of other brands in the same category and other categories sold in the store, which will have a direct impact on the sales revenue transfer the manufacturer can get from the contract. Based on the estimation results, we conduct counterfactual experiments to study the impacts of the chosen contract design on the store and manufacturers\u27 profit. The information asymmetry in our model can lead to the well-known adverse selection entry decisions from manufacturers. Our first counterfactual experiment suggests that a contingent component of revenue transfer in contracts is critical to solve the adverse selection problem caused by the information asymmetry between the store and manufacturers in our model. However, we also show that the current contract is suboptimal from a social welfare perspective. We follow up with another counterfactual experiment to show that, under the current contract, it is mutually beneficial for the store and manufacturers to reduce the degree of information asymmetry. Therefore, the current contract provides an incentive for manufacturers to reveal their private information