DP3976 Endogenous Contracts Under Bargaining in Competing Vertical Chains

Author(s): Chrysovalantou Milliou, Emmanuel Petrakis, Nikolaos Vettas
Publication Date: July 2003
Keyword(s): bargaining, non-linear contracts, strategic contracting, two-part tariffs, vertical chains, wholesale prices
JEL(s): L13, L14, L22, L42, L81
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3976

We investigate the endogenous determination of contracts in competing vertical chains where upstream and downstream firms bargain first over the type of contract and then over the contract terms. Upstream firms always opt for non-linear contracts, which specify the input quantity and its total price. Downstream firms also opt for non-linear contracts, unless their bargaining power is low, in which case they prefer wholesale price contracts. While welfare is maximized under two-part tariffs, these are dominated in equilibrium by non-linear contracts.