DP2110 On Intrabrand and Interbrand Competition: The Strategic Role of Fees and Royalties

Author(s): Kamal Saggi, Nikolaos Vettas
Publication Date: March 1999
Keyword(s): intrabrand competition, royalties, strategic contracting, two-part tariffs
JEL(s): L13, L14, L22, L42
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2110

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When we endogenize the number of downstream firms, we find that each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss how allowing for contracts that involve both fees and per-unit payments dramatically alters the strategic incentives.