Endogenous Contracts Under Bargaining in Competing Vertical Chains

Abstract

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.

Keywords: Vertical chains, strategic contracting, bargaining, two-part tariffs, non-linear contracts, wholesale prices

JEL Classification: L13, L14, L22, L42, L81