Double markups under bilateral vertical contracting

Abstract

This paper examines price markups at the upstream and downstream levels of a bilateral vertical structure in which firms provide essential inputs to one another and engage in price competition in the downstream market. We show that the ratios of noncooperative equilibrium markups are primarily determined by the price elasticities of demand and the retail pass-through rates and, moreover, that coordination on input prices leads to a collusive equilibrium outcome in the final-product market.