The ambiguous competitive effects of passive partial forward ownership

Abstract

In a two-tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward ownership (PPFO) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFO is pro-competitive and welfareincreasing. While under two-part tariffs, it is anticompetitive and welfare-decreasing. These hold irrespectively of the degree of product differentiation, the observability or not of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.

Vertical contracting between a vertically integrated firm and a downstream rival

“…There is also a literature that considers partial vertical integration (partial passive ownership), either forward or backward (upstream firms acquire non-controlling shares in downstream firms, and vice versa). One question addressed in that literature is what are the welfare effects of partial vertical integration compared to vertical separation and/or full integration, given the contract types (e.g., Hunold and Stahl 2016;Lestage 2021;Alipranti et al 2022;Papadopoulos et al 2022). It would be interesting to examine the welfare implications of contracts types for given degrees of partial vertical integration, in a general setting that will account for the demand structure, the mode of competition, contract (un)observability and bargaining (among others).…”

“…In a setting with linear demand, downstream Cournot and take-it-or-leave-it contract offers by an upstream supplier that are unobservable by downstream firms,Papadopoulos et al (2022) show that two-part tariffs are welfare-superior to linear ones for any degree of partial forward ownership.…”