Opportunism in Vertical Contracting: A Dynamic Perspective

58 Pages Posted: 28 Nov 2020 Last revised: 30 Apr 2024

See all articles by Jihwan Do

Jihwan Do

School of Economics, Yonsei University

Jeanine Miklós-Thal

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2024

Abstract

This article 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 degree 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 opportunism. Our results are relevant for vertical merger policy and for competition policy on vertical restraints.

Keywords: vertical contracting, opportunism, dynamic oligopoly, vertical mergers, vertical restraints

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

Suggested Citation

Do, Jihwan and Miklós-Thal, Jeanine, Opportunism in Vertical Contracting: A Dynamic Perspective (April 30, 2024). Available at SSRN: https://ssrn.com/abstract=3709550 or http://dx.doi.org/10.2139/ssrn.3709550

Jihwan Do

School of Economics, Yonsei University ( email )

Yonsei University Graduate School, 50 Yonsei-Ro
Seodaemun-Gu
Seoul, Seoul 03722

Jeanine Miklós-Thal (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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