Fixed Payments in Production Contracts for Private Labels: An Economic Analysis of the Japanese Subcontract Act
Retailers often procure money from their suppliers (subcontractors) in production contracts for their private labels. In Japan, the Subcontract Act prohibits such conduct when suppliers are small firms. In this article, we set up a model reflecting a situation in which the Subcontract Act might be applied: the supplier’s marginal production costs are increasing because they are small firms. Each supply chain is vertically separated. We find that this prohibition increases average costs of each supply chain and raises the equilibrium price of private labels. This is merely transferring wealth from consumers to subcontractors while producing allocative inefficiency.
The authors thank the participants of the annual meeting of the Japanese Association for Applied Economics (Autumn 2013), 33rd symposium in Economics at Daito Bunka University (Autumn 2013), and seminar at the Department of Economics and Finance of the University of Canterbury, New Zealand (Autumn 2016), for helpful comments and suggestions. The final version of this article was written when one of the authors, Goto, visited the University of Canterbury in 2016–2017 as a visiting fellow. The hospitality of the University of Canterbury is gratefully acknowledged. Nariu was supported by JSPS KAKENHI grants 26285098 and 15K03749 for this work.
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