Less is more in bilateral channel coordination? Linear wholesale pricing may out-perform more complex contracts

In many markets we observe that suppliers and retailers use simple, linear wholesale tariffs instead of non-linear tariffs. Does this mean that they leave money on the table? Not necessarily. On the contrary, in a bilateral bargaining framework with a dominant supplier and two competing retailers, we find that firms may leave money on the table if they use non-linear tariffs. Fewer instruments could generate more profit (less is more). We show that whether industry profit is higher with linear tariffs or non-linear tariffs depends on the degree of retail competition and the distribution of bargaining power. In some cases, the retailers and the supplier have conflicting preferences with respect to the contract structure (linear or non-linear tariffs). In other cases, however, both the supplier and the retailers are better off with linear tariffs.