Three common business practices as responses to asymmetric information problems

My purpose in this dissertation is to study three business strategies that companies have adopted to deal with either problems or opportunities presented by asymmetric information.;Chapter 2 introduces a common industry practice referred to as a Special Pricing Agreement (SPA) to the vertical restraints literature. An SPA is a private agreement between a manufacturer and a distributor that specifies special pricing from the manufacturer to the distributor for a specific customer. The special wholesale price is significantly discounted from published cost and is exclusive to the distributor. A manufacturer can impose a vertical restraint on the market by denying the discounted wholesale price to other distributors effectively barring them from selling the manufacturer's product. I delineate the circumstances necessary for a manufacturer to choose to quote an SPA and investigate the possibility that SPAs decrease competition between manufacturers.;Chapter 3 examines the claim that high inflation allows businesses to increase profit margins. A model is developed that features asymmetric information about seller cost and buyers who have search costs. During chronic inflation, price increases become a part of doing business. Buyers expect price increases, so sellers give them price increases whether their costs increase or not. In an environment of expected inflation, firms can raise prices faster than their costs are increasing and increase their profit margins.;I then test a series of hypotheses from the relevant literature and this paper. I test whether: (1) Industry and firm profit margins depend significantly on inflation, (2) Profit margins are relatively higher in an inflationary environment if the seller's associated buyer's search cost is relatively high, (3) Profit margins increase as expected inflation and inflation volatility increases, (4) Profit margins fall with increases in inflation volatility if buyer search cost is low, and (5) Industry and firm profit margins increase as the difference between expected inflation and the actual change in industry/firm cost increases. I find support for Hypotheses 1, 2, and 5, and reject Hypotheses 3 and 4.;Chapter 1 asks: How does a level of management between the owner of a firm and subordinate employees affect the owner's decision to either internally integrate a function to make inputs or contract out and buy inputs from an independent supplier? I model a situation in which a manager can direct her subordinate employee to perform activities that serve her interests rather than the owner of the firm. This type of self-serving manager reduces the effectiveness of subordinate performance incentives intended to promote effort that benefits the owner. The owner responds by increasing the subordinate's performance incentives. The owner effectively competes with the manager for the subordinate's effort. The burden of a self-serving managerial bureaucracy may increase subordinate performance incentives to a level such that the owner prefers to procure inputs from an outside source rather than producing the inputs internally. I also examine common business practices used to alleviate bureaucratic misdirection of subordinate employee effort.