Working Paper: CEPR ID: DP16951
Authors: Jihwan Do; Jeanine Miklosthal
Abstract: 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.
Keywords: vertical contracting; opportunism; dynamic oligopoly; vertical mergers; vertical restraints
JEL Codes: D40; D43; L13; L14; L42; C73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| faster reaction speeds (C69) | reduction in opportunism (D23) |
| greater patience (D15) | reduction in opportunism (D23) |
| asymmetries in reaction speeds (C69) | reduction in opportunism (D23) |
| faster reaction speeds (C69) | shorter intervals between recontracting events (L14) |
| shorter intervals between recontracting events (L14) | weaker supplier's incentive to behave opportunistically (L14) |
| greater patience (D15) | supplier cares more about future profits (L14) |
| supplier cares more about future profits (L14) | reduction in opportunism (D23) |