First-Mover Advantage Reversals Under Passive Cross Forward Ownership in Vertically Related Markets

Abstract

We consider a two-tier industry with an upstream monopolist trading, via interim observable linear tariff contracts, with two differentiated goods downstream of Stackelberg competitors. The upstream monopolist owns a symmetric minority share on both downstream customers, i.e., there is passive cross-forward ownership (PCFO). We show that PCFO may reverse the well-known first-mover advantage of the Stackelberg game. PCFO is also pro-competitive and welfare enhancing.

Keywords: passive cross forward ownership, vertical relations, linear tariffs, interim observable contracts, Stackelberg competition, first mover advantage

JEL Classification: D43, L13, L14