VERTICAL CONTRACTS AS STRATEGIC COMMITMENTS - HOW ARE THEY ENFORCED

This paper addresses the strategic commitment value of various price a nd nonprice vertical contracts. Assuming contract offers are sufficien tly public to have strategic importance, we focus on commitment as a n ecessary and separable condition to be met. The analysis has two compo nents. First, considering the relationship between a monopolist manufa cturer and his imperfectly competing retailers, enforcement conditions necessary for alternative vertical contracts to have commitment value are identified in the static (reputation-free) context. It is shown t hat external help (i.e., enforcement by nonsignatories) is necessary f or bilateral minimum resale price maintenance (price floors) and exclu sive territory contracts to have commitment value, whereas maximum res ale price maintenance (price ceilings) do not require such help (i.e., they are internally enforcing). Second, the paper provides an analysi s of the U.S. case law and discusses the empirical validity of the ''e xternal enforcement'' assumption that is shown to underlie recent prop osals to make certain vertical restraints illegal.