Abstract
We investigate the endogenous choice of price (Bertrand) and quantity (Cournot) contract and the resulting social welfare in a vertically related up-stream-downstream market with a consumer-friendly upstream firm. We find that choosing price (quantity) contract is the dominant strategy for downstream firms when the two-part-tariff pricing contract is determined through centralized (decentralized) Nash bargaining. Moreover, if the consumer-friendly up-stream firm’s valuation over consumer surplus is sufficiently high and the product differentiation degree is sufficiently low, centralized bargaining is welfare-superior to decentralized bargaining. On the other hand, if the consumer-friendly upstream firm’s valuation over consumer surplus is sufficiently low and the product differentiation degree is sufficiently high, decentralized bargaining is welfare-superior to centralized bargaining. We also show that decentralized bargaining generates higher consumer surplus as compared to centralized bargaining, irrespective of both the product differentiation degree and the upstream firm’s valuation over consumer surplus.
Highlights
There is a well-established line of research analyzing the effects of Cournot and Bertrand competition on social welfare
We show that decentralized bargaining generates higher consumer surplus as compared to centralized bargaining, irrespective of both the product differentiation degree and the upstream firm’s valuation over consumer surplus
If the consumer-friendly upstream firm is involved in a centralized bargaining with the downstream firms, choosing price contract is the best strategy for the final goods producers
Summary
There is a well-established line of research analyzing the effects of Cournot and Bertrand competition on social welfare. Alipranti et al (2014) [6] demonstrate that the standard conclusions about price and quantity competition can be altered in the context of a vertically related market They show that when a monopoly input supplier and two final goods producers determine the two-part tariff vertical pricing contracts through a decentralised generalised Nash bargaining process, the equilibrium profits of the final goods producers and social welfare are higher under Cournot competition. Their analysis extends the literature that compares Cournot and Bertrand outcomes in standard one-tier oligopoly markets by considering a vertically related setting.
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