Working Paper: CEPR ID: DP2110
Authors: Kamal Saggi; Nikolaos Vettas
Abstract: We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When we endogenize the number of downstream firms, we find that each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss how allowing for contracts that involve both fees and per-unit payments dramatically alters the strategic incentives.
Keywords: intrabrand competition; strategic contracting; two-part tariffs; royalties
JEL Codes: L13; L14; L22; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| royalty rate (D33) | competitive behavior of downstream firms (L11) |
| higher competition among upstream firms (L11) | lower royalty rates (L49) |
| number of downstream firms endogenized (D21) | strategic incentive to minimize the number of independent downstream divisions (L22) |
| contracts involving fees and per-unit payments (L14) | strategic incentives of upstream firms (L21) |