Vertical contracting between a vertically integrated firm and a downstream rival

Abstract

Compared to linear tariffs, two-part tariffs are generally perceived as being more efficient since double marginalization is avoided. We investigate the efficiency of two-part tariffs vs. linear tariffs when a vertically integrated firm sells its input also to an independent downstream firm selling a differentiated substitute product. We find that a linear tariff can generate higher consumer surplus and overall welfare than a two-part tariff when the independent downstream firm is rather powerful in negotiating the contract terms, and downstream competition is in prices (Bertrand competition). In that case, the integrated firm makes more profits under a linear tariff than under a two-part tariff. In contrast, under downstream Cournot competition two-part tariffs are always welfare-superior. Under linear demand, we find that, irrespective of the mode of downstream competition and the distribution of bargaining power, the preferred contract type of the integrated firm is always welfare-superior.

Dynamic Vertical Foreclosure with Learning-by-Doing Production Technologies

“…, we find that it is profitable for the retailer to purchase both products in the final period of the game. 11 The second period is the last period of the game and excluding one supplier from the market by offering disadvantaged terms only reduces the variety in this period without opting for future cost reduction.…”

“…We maintain that when goods are close substitutes, retailer's profits are higher under exclusivity since the learning effect dominates the product variety effect. Foreclosure has also recently been studied in vertical contracting frameworks with vertically integrated firms by Reisinger and Tarantino (2015) [10] and Kourandi and Pinopoulos (2023) [11]. We depart from vertical integration and study how learning affects future production efficiency and, thus, the market exclusion of upstream producers.…”