Nonlinear Contracts and Vertical Restraints in Bilateral Duopoly

Abstract

This paper studies the competitive effects of a variety of publicly observable nonlinear contracts and vertical restraints in bilateral duopoly. When suppliers offer menus of contracts and inputs are sufficiently differentiated, there exist equilibria in which both retailers purchase from both suppliers at wholesale prices above marginal cost to soften downstream competition. In these common agency equilibria, vertical restraints such as all-units discounts, market-share requirements and no-steering rules affect upstream competition for marginal sales and lead to higher prices and lower welfare than two-part tariffs. Whereas with sequential contracting the industry monopoly outcome is the unique equilibrium, with simultaneous contracting coordination failures may lead to less profitable equilibria.

Note: This paper is currently under revision, a final version will be posted soon.

Keywords: Bilateral oligopoly, nonlinear pricing, vertical restraints, facilitating practices

JEL Classification: D43, L13, L42