Price-Dependent Profit Sharing as an Escape from the Bertrand Paradox

15 Pages Posted: 7 Mar 2007

See all articles by Øystein Foros

Øystein Foros

Norwegian School of Economics (NHH) - Department of Business and Management Science

Kare P. Hagen

Norwegian School of Economics (NHH) - Department of Economics

Hans Jarle Kind

Norwegian School of Economics & Business Administration (NHH); CESifo (Center for Economic Studies and Ifo Institute); Norwegian School of Economics (NHH) - Department of Economics

Date Written: February 2007

Abstract

In this paper we show how an upstream firm can prevent destructive competition among downstream firms producing relatively close substitutes by implementing a price-dependent profit-sharing rule. The rule also ensures that the downstream firms undertake investments which benefit the industry in aggregate. The model is consistent with observations from the market for content commodities distributed by mobile networks.

Keywords: profit-sharing, vertical restraints, investments, competition

JEL Classification: L13, L22

Suggested Citation

Foros, Øystein and Hagen, Kare Petter and Kind, Hans Jarle, Price-Dependent Profit Sharing as an Escape from the Bertrand Paradox (February 2007). CESifo Working Paper Series No. 1927, Available at SSRN: https://ssrn.com/abstract=968597 or http://dx.doi.org/10.2139/ssrn.968597

Øystein Foros

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Kare Petter Hagen

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Hans Jarle Kind (Contact Author)

Norwegian School of Economics & Business Administration (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 583 890 (Phone)
+47 55 583 901 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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