Information exchange through secret vertical contracts

We study a common agency problem in which two downstream firms, who are local monopolists and receive private demand signals, offer secret menus of two-part tariff contracts to their common supplier. While direct communication is not possible, they may still exchange their information through signal-contingent menus of vertical contracts. We show that a perfect Bayesian equilibrium exists in which information is transmitted, and downstream firms obtain nearly the first-best industry surplus. The use of both fixed charges and slotting fees is necessary for such a result. Our analysis provides a novel explanation for the use of slotting fees in vertical contracting based on its value as an information transmission device.