Abstract
On an intermediate goods market with asymmetric production technologies as well as vertical and horizontal product differentiation, we analyze the influence of simultaneous competition for resources and customers. The intermediaries face either price or quantity competition on the output market and a monopolistic, strategically acting supplier on the input market. We find that there exist quality and productivity differences such that for quantity competition only one intermediary is willing to procure inputs from the input supplier, while for price competition both intermediaries are willing to purchase inputs. Moreover, the well-known welfare advantage of price competition can in general be no longer confirmed in our model with an endogenous input market and asymmetric intermediaries.
Highlights
We consider a differentiated intermediate goods market in which two intermediaries compete for customers on the sales side as well as for inputs on the procurement side
We established that introducing a strategically acting input supplier may lead to exclusion of one intermediary from the input market if the asymmetries are sufficiently large (Lemma 1)
There exists a range of asymmetries where in Cournot competition the input prices are too high for one intermediary, while in Bertrand competition both intermediaries demand positive quantities on the input market (Propositions 1 and 2)
Summary
We consider a differentiated intermediate goods market in which two intermediaries compete for customers on the sales side as well as for inputs on the procurement side. A vertical market structure that is similar to the one discussed in our work and incorporates the market’s supply side is for example considered by [13] They analyze an intermediate goods market in which a profit-maximizing input supplier interacts with two unequally productive intermediaries who provide a homogeneous final good. He considers a setting with an upstream market including a monopolistic supplier who provides an intermediate input good and an imperfectly competitive downstream market with intermediaries (retailers) producing differentiated products. While considering vertical and horizontal product differentiation, the focus of our analysis is put on the impact of simultaneous competition for resources and customer demand on the market outcome under Cournot and Bertrand competition with two intermediaries. A final conclusion is made in Section 4, whereas additional computations and proofs can be found in Appendix
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