Opportunism in Vertical Contracting: A Dynamic Perspective

53 Pages Posted: 28 Nov 2020 Last revised: 19 Jan 2021

See all articles by Jihwan Do

Jihwan Do

University of Rochester

Jeanine Miklós-Thal

University of Rochester - Simon Business School

Date Written: January 19, 2021

Abstract

This paper proposes a dynamic approach to modeling opportunism in bilateral vertical contracting between an upstream monopolist and competing downstream firms. Unlike previous literature on opportunism which has focused on games in which the upstream firm makes simultaneous secret offers to the downstream firms, we model opportunism as a consequence of asynchronous recontracting in an infinite-horizon continuous-time model. We find that the extent of opportunism depends on the absolute and relative reaction speeds of the different bilateral upstream-downstream firm pairs and on the firms' discount rate. Patience, fast reaction speeds, and asymmetries in reaction speeds across upstream-downstream pairs are shown to alleviate the opportunism problem.

Keywords: vertical contracting, opportunism, dynamic oligopoly

JEL Classification: D40, D43, L13, L14, L42, C73

Suggested Citation

Do, Jihwan and Miklós-Thal, Jeanine, Opportunism in Vertical Contracting: A Dynamic Perspective (January 19, 2021). Available at SSRN: https://ssrn.com/abstract=3709550 or http://dx.doi.org/10.2139/ssrn.3709550

Jihwan Do

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

Jeanine Miklós-Thal (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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