Complementary Monopolies with Asymmetric Information
39 Pages Posted: 14 Feb 2018 Last revised: 25 May 2019
Date Written: May 2, 2019
We investigate how asymmetric information on final demand affects strategic interaction between a downstream monopolist and a set of upstream monopolists, who independently produce complementary inputs. We study an intrinsic private common agency game in which each supplier i independently proposes a pricing schedule contract to the assembler, specifying the supplier’s payment as a function of the assembler’s purchase of input i. We provide a necessary and sufficient equilibrium condition. A lot of equilibria satisfy this condition but there is a unique Pareto undominated Nash equilibrium from the suppliers’ point of view. In this equilibrium there are unavoidable efficiency losses due to excessively low sales of the good. However, suppliers may be able to limit these distortions by implicitly coordinating on an equilibrium with a rigid (positive) output in bad demand circumstances.
Keywords: complementary inputs, asymmetric information, private common agency games
JEL Classification: D82, L10, L14, L22
Suggested Citation: Suggested Citation