Unobserved Wholesale Contracts

A manufacturer with private information about product quality sells through a retailer to end consumers. By hiding wholesale pricing contracts from end consumers, the manufacturer can hide his private information, eliminate signaling distortions and earn higher (expected) profit compared to observable wholesale pricing as well as direct selling; consumers may also earn higher surplus under such contracts even though they do not learn true product quality. Policies that mandate disclosure of quality or of upstream contracts can reduce welfare relative to the equilibrium with hidden contracts. We formalize this interaction as a class of intermediated signaling games—distinct from standard signaling models because of the hidden interaction with the intermediary—and introduce a new belief refinement, IC-I, tailored to such games and analogous to the Intuitive Criterion.