Contract Contingency in Vertically Related Markets

Quaderni - Working Paper DSE N° 1079

35 Pages Posted: 1 Oct 2016

See all articles by Emanuele Bacchiega

Emanuele Bacchiega

University of Bologna - Department of Economics

Oliver Bonroy

French National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory

Emmanuel Petrakis

University of Crete - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2016

Abstract

We study the optimal contract choice of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. The upstream supplier can offer an exclusive contract to one of the firms or non-exclusive contracts to both firms. Each of the latter can be made contingent or not on the breakdown of the negotiations between the upstream supplier and the rival downstream firm. The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers non-exclusive contracts and makes each of them contingent or non-contingent such as to guarantee the most favorable outside option in its negotiations. Our main results hold under an horizontally differentiated downstream market too.

Keywords: Vertical relationships, exclusive vs. non-exclusive relationships, contract contingency, two-part tariff , product di fferentiation

JEL Classification: D43, L13, L14

Suggested Citation

Bacchiega, Emanuele and Bonroy, Oliver and Petrakis, Emmanuel, Contract Contingency in Vertically Related Markets (September 29, 2016). Quaderni - Working Paper DSE N° 1079. Available at SSRN: https://ssrn.com/abstract=2845846 or http://dx.doi.org/10.2139/ssrn.2845846

Emanuele Bacchiega (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
40126 Bologna, 40125
Italy
+390512098486 (Phone)
+390512098493 (Fax)

Oliver Bonroy

French National Institute for Agricultural Research (INRA) - Grenoble Applied Economic Laboratory ( email )

BP47
38040 Grenoble Cedex
France

Emmanuel Petrakis

University of Crete - Department of Economics ( email )

GR-74100 Rethymnon, GR-74100
Greece
+30 28310 77409 (Phone)
+30 28310 77406 (Fax)

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