Working Paper: CEPR ID: DP3976
Authors: Chrysovalantou Milliou; Emmanuel Petrakis; Nikolaos Vettas
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: bargaining; nonlinear contracts; strategic contracting; two-part tariffs; vertical chains; wholesale prices
JEL Codes: L13; L14; L22; L42; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| upstream bargaining power (L14) | choice of nonlinear versus wholesale price contracts (L14) |
| product differentiation (L15) | likelihood of choosing a wholesale price contract (L14) |
| upstream firms prefer nonlinear contracts (L14) | joint profits of firms (L21) |
| downstream firms' bargaining power (L14) | choice of nonlinear contracts (D86) |
| low bargaining power (D43) | less favorable contract terms for downstream firms (L14) |
| welfare maximized under two-part tariff contracts (D69) | actual market outcomes (D41) |
| degree of product differentiation (L15) | contract choice (K12) |