Retailers' choice of product variety and exclusive dealing under asymmetric information

This article considers vertical relations between an upstream manufacturer and a downstream retailer that can independently obtain a low-quality, discount substitute. The analysis reveals that under full information, the retailer offers both varieties if and only if it is optimal to do so under vertical integration. However, when the retailer is privately informed about demand, it offers both varieties even if under vertical integration it is profitable to offer only the manufacturer's product. If the manufacturer can impose exclusive dealing, then under asymmetric information it will do so and foreclose the low-quality substitute even if under vertical integration it is profitable to offer both varieties.