Strategic Incentives When Supplying to Rivals With an Application to Vertical Firm Structure
41 Pages Posted: 28 Dec 2016
Date Written: October 10, 2016
We consider a vertically integrated input monopolist supplying to a differentiated downstream rival. With linear input pricing, at the margin the firm unambiguously wants the rival to expand — unlike standard oligopoly with no supply relationship — for either Cournot or Bertrand competition. With a two‐part tariff for the input, the same result holds if downstream choices are strategic complements, but is reversed for Cournot with strategic substitutes. We analyze vertical delegation as one mechanism for inducing expansion or contraction by the rival/customer.
Keywords: Strategic Competition against Customers, Vertical Delegation
JEL Classification: L13, D43, L14, L22
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