Downstream competition and profits under different input price bargaining structures

Abstract

In a vertically related duopoly with input price bargaining, this paper re-examines the downstream firms’ profitability under different market competition degrees. It is shown the rather counterintuitive result that downstream firms earn highest profits with semi-collusion, whose level depends on the upstream bargaining structures, the relative parties’ bargaining power, and the parameters measuring the degree of product differentiation in the downstream market. Concerning social welfare, the key result is that policymakers can tolerate some degree of collusion with decentralized bargaining structures; centralized structures advise for a more procompetitive policy.

Vertical cross‐ownership, input price discrimination, and social welfare

“…In this paper, different from Chen et al (2021), we consider input price discrimination, forward and backward cross‐ownership, and analyze the impact of vertical cross‐ownership with input price discrimination in a vertically related market on industry profit, consumer surplus, and social welfare. The inclusion of bargaining process complexes the analysis but makes our framework more realistic and relevant (Buccella & Fanti, 2021; Pinopoulos, 2019, 2021; Wang & Li, 2020). Common belief is that common ownership is more likely to improve welfare when there are fewer downstream firms and a greater degree of product differentiation.…”