Economics of Collective Refusals to Supply

Upstream Competition with Complex and Unobservable Contracts

“…On the other hand, we show inAtiyas et al (2012) that at least one of the VIFs will always find it profitable to make an offer to the downstream rival when contracts are observable.…”

Essays in industrial organization

“…7 In the third stage, …rm I bargains with its customer(s) over the contract terms. 8 To model the bargaining game, we invoke the Nash equilibrium of simultaneous generalized Nash bargaining games, in which the bargaining power of …rm I is given by and of the downstream …rm(s) by 1 , with 0 < < 1. We assume that …rm I bargains with each downstream …rm simultaneously and separately and that during the negotiations of a bargaining pair, each of its agents takes as given the outcome of the simultaneously-run negotiations of the other bargaining pair.…”

“…Another justi…cation of …rm I's decision not to commit to serve its customer(s) is equal to a refusal to supply the downstream competitor(s). 8 The justi…cation for this order of moves is that the contract terms are easier to change than the input production capabilities of …rm I and their determination is a shorter run decision and is adjusted to actual market conditions. 9 Such an assumption is common in the literature on multilateral contracting (e.g., Cremer and Riordan, 1987, Horn and Wolinsky, 1988, Hart and Tirole, 1990, O'Brien and Sha¤er, 1992, McAfee and Schwartz, 1994and 1995, Rey and Vergé, 2004, Milliou and Petrakis, 2007, Alipranti et al 2014).…”

“…That is, we explore the incentives and the implications of vertical separation when it is accompanied by the entry of the vertically disintegrated upstream …rm into the downstream market, and in turn we provide an additional argument in favor of vertical separation. 7 A number of papers consider markets with multiple vertically integrated incumbents and, as we do in the entry case, examine their incentives to supply the input to a non-integrated downstream entrant (e.g., Ordover and Sha¤er, 2007, Hö-er and Schmidt, 2008, Brito and Pereira, 2010, Bourreau et al, 2011, Atiyas et al, 2012. They show that an incumbent does not foreclose the entrant unless the latter's product is a closer substitute to its own product than to its rival's (Ordover and Sha¤er, 2007), it is asymmetrically located (Brito and Pereira, 2010), or contracts are unobservable (Atiyas et al, 2012).…”

“…7 A number of papers consider markets with multiple vertically integrated incumbents and, as we do in the entry case, examine their incentives to supply the input to a non-integrated downstream entrant (e.g., Ordover and Sha¤er, 2007, Hö-er and Schmidt, 2008, Brito and Pereira, 2010, Bourreau et al, 2011, Atiyas et al, 2012. They show that an incumbent does not foreclose the entrant unless the latter's product is a closer substitute to its own product than to its rival's (Ordover and Sha¤er, 2007), it is asymmetrically located (Brito and Pereira, 2010), or contracts are unobservable (Atiyas et al, 2012). In these papers, all the vertically integrated …rms, and not just one of them as in our paper and in Hö-er and Schmidt (2008), can supply the entrant.…”