In many industries, upstream manufacturers pay downstream retailers for achieving quantity or market share targets. These “vertical rebates” may mitigate downstream moral hazard by inducing greater retail effort but may also incentivize retailers to drop competing products. We study these offsetting effects empirically for a rebate paid to one retailer. Using a field experiment, we exogenously vary the outcome of retailer effort. We estimate models of consumer choice and retailer behavior to quantify the rebate’s effect on retail assortment and effort. We find that the rebate is designed to exclude a competing product and fails to maximize social surplus.

Bundling is at the forefront of many policy debates as new technologies allow firms to implement more complex bundling arrangements. Realistic analyses of bundling—particularly between suppliers and retailers—require detailed data on both supply arrangements and consumer demand. We analyze firms' use of bundling as a vertical restraint (known as full-line forcing) using extensive supply and demand data from the video rental industry. Our model captures key details of the market that determine firms' contractual choices, and sheds light on the implications of these decisions. The empirical approach provides a model for how to analyze bundling when detailed data are available.