Price vs. quantity competition in a vertically related market

Abstract

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Price vs. quantity competition in a vertically related market revisited

“…We, therefore, impose a non-negativity constraint on the input prices. In contrast to Alipranti et al (2014), we show that if the upstream firm's marginal cost of production is low, Cournot competition may yield lower output level, lower consumer surplus and lower social welfare compared to Bertrand competition, thus supporting the findings of Singh and Vives (1984) even in a vertical structure.…”

“…As in Alipranti et al (2014), we assume that U produces the input at a constant marginal cost of production. While Alipranti et al (2014) assumed that the upstream firm produces at zero marginal cost, we generalise it by assuming that the marginal cost of the upstream firm is c, where ܿ ∈ (0, ܽ). This generalisation helps us to show that the negative input price in Alipranti et al (2014) is not an artefact of their assumption of zero marginal cost of the upstream firm.…”

“…The downstream firms require a critical input for production that they purchase from a monopoly input supplier, U, through two-part tariff contracts involving an up-front fixed-fee, i F and a per-unit price, i w , 1, 2 i  . As in Alipranti et al (2014), we assume that U produces the input at a constant marginal cost of production. While Alipranti et al (2014) assumed that the upstream firm produces at zero marginal cost, we generalise it by assuming that the marginal cost of the upstream firm is c, where ܿ ∈ (0, ܽ).…”

“…We consider an economy similar to Alipranti et al (2014) where two downstream firms, denoted by Di, produce differentiated products, ݅ , ݆= 1, 2 ; ݅≠ ݆. The downstream firms require a critical input for production that they purchase from a monopoly input supplier, U, through two-part tariff contracts involving an up-front fixed-fee, i F and a per-unit price, i w , 1, 2 i  .…”

“…In a recent paper, Alipranti et al (2014) show that when a monopoly input supplier bargains with the downstream firms over a two-part tariff vertical pricing contract, the upstream firm subsidises the quantity setting downstream firms via negative wholesale input prices. This creates higher social welfare under Cournot competition compared to Bertrand competition.…”