The welfare effects of category captaincy

We investigate the welfare consequences of the choice of a category captain by a retailer, who can select one of his two suppliers to provide services that may boost demand (vertical practice). The welfare effects of the vertical practice depend on the timing of the decisions. When the tariff offers are made after the choice of the category captain and once the effort is exerted, a category captain improves the retailer's profit, consumer surplus and welfare, but reduces the rival's profit. The retailer may however choose the less efficient supplier to enjoy a larger share of a smaller joint profit, thus failing to maximize welfare. When, by contrast, the effort is chosen after the tariff stage, then tariffs are inefficient, consumers are harmed,
and welfare may decrease. We extend these results when the effort exerts spillovers on demand for the rival product (horizontal practice).