Accommodation effects with downstream Cournot competition

Abstract

In a two‐tier industry where a vertically integrated firm sells input to and competes against a downstream rival, we show that, when the upstream division of the integrated firm chooses its input quantity, the downstream division credibly accommodates rival sales despite downstream competition being Cournot. Even taking rival quantity as given, the downstream division knows that, by limiting its own final‐good quantity, it can increase rival revenue, and therefore willingness‐to‐pay for the input. Upstream price setting leaves no room for downstream accommodating behavior implying that for a vertically integrated input monopolist, setting input price or input quantity makes crucial difference.