Secrect Contracting and Nash-in-Nash Bargaining

In take-it-or-leave-it vertical contracting, an equilibrium with passive beliefs may fail to exist. We argue that this problem can be alleviated by tackling the contracting stage of the game through a cooperative approach. The outcome of the take-it-or-leave-it game then coincides with the limit of the cooperative solution when the bargaining power of the downstream firms tends to zero. We argue that the cooperative approach, which requires a different interpretation of the out-of-equilibrium beliefs, is not affected by the well-known existence problems of the non-cooperative one.