DP16951 Opportunism in Vertical Contracting: A Dynamic Perspective
This paper proposes a dynamic approach to modeling opportunism in bilateral vertical
contracting between an upstream monopolist and competing downstream firms.
Unlike previous literature on opportunism which has focused on games in which the
upstream firm makes simultaneous secret offers to the downstream firms, we model
opportunism as a consequence of asynchronous recontracting in an infinite-horizon
continuous-time model. We find that the degree of opportunism depends on the absolute
and relative reaction speeds of the different bilateral upstream-downstream
firm pairs and on the firms' discount rate. Patience, fast reaction speeds, and asymmetries
in reaction speeds across upstream-downstream pairs are shown to alleviate
the opportunism problem. Our results are relevant for vertical merger policy and for
competition policy on vertical restraints.