Price vs. quantity competition in a vertically related market revisited

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Letters,[124][125][126] show that in a vertically related market Cournot competition yields higher social welfare compared to Bertrand competition if the upstream firm subsidises the quantity setting downstream firm's production via negative wholesale input prices. However, the assumption of negative input prices is not economically viable as it would encourage the downstream firms to buy an unbounded amount of inputs knowing that the upstream firm would pay the downstream firms for each unit of input they purchase. We show that the welfare ranking may be reversed once we introduce a nonnegativity constraint on the input price. JEL-Codes: D430, L130, L140. Terms of use: Documents in EconStor may

Price vs. Quantity Competition in a Vertically Related Market Revisited

“…It is worth mentioning that the problem of negative input price persists even if the marginal cost of input production is positive, i.e., K > 0. Imposing a non-negativity constraint on the input price, we show in our working paper (Basak and Mukherjee, 2016) that Cournot competition generates lower (higher) social welfare than Bertrand competition if the marginal cost of input production is sufficiently low (high).…”

Centralized bargaining with pre‐donation in a vertically related industry

“…2 ) showed that when a two-part pricing contract is determined by decentralized bargaining, Cournot competition in the downstream market yields higher consumer surplus and social welfare than Bertrand competition. This result was proven to be reversed if there is a non-negativity constraint in input prices (Basak & Mukherjee, 2017) or if retailers can engage in demand-enhancing investment (Liu & Wang, 2022). Basak and Wang (2016) further showed that if a two-part pricing contract is determined by centralized bargaining, then Bertrand competition becomes the equilibrium mode of competition when the strategic variables in the final goods market are endogenized.…”