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Strategic incentives when supplying to rivals with an application to vertical firm structure

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  • Moresi, Serge
  • Schwartz, Marius

Abstract

We consider a vertically integrated input monopolist supplying to a differentiated downstream rival. With linear input pricing, at the margin the firm unambiguously wants the rival to expand—unlike standard oligopoly with no supply relationship—for either Cournot or Bertrand competition. With a two-part tariff for the input, the same result holds if downstream choices are strategic complements, but is reversed for Cournot with strategic substitutes. We analyze vertical delegation as one mechanism for inducing expansion or contraction by the rival/customer.

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  • Moresi, Serge & Schwartz, Marius, 2017. "Strategic incentives when supplying to rivals with an application to vertical firm structure," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 137-161.
    • Handle: RePEc:eee:indorg:v:51:y:2017:i:c:p:137-161
    DOI: 10.1016/j.ijindorg.2016.12.005
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    Cited by:

    1. Lemus, Ana B. & Moreno, Diego, 2020. "Strategic incentives for keeping one set of books under the Arm’s Length Principle," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 78-90.
    2. Koning, Kendall J. & Yankelevich, Aleksandr, 2018. "From internet “Openness” to “Freedom”: How far has the net neutrality pendulum swung?," Utilities Policy, Elsevier, vol. 54(C), pages 37-45.
    3. Chrysovalantou Milliou & Joel Sandonis, 2020. "Vertical foreign direct investment: Make, buy, and sell," Review of International Economics, Wiley Blackwell, vol. 28(3), pages 884-912, August.
    4. Luciano Fanti & Marcella Scrimitore, 2017. "Hiring a manager or not? When asymmetric equilibria arise under outsourcing to a rival," Discussion Papers 2017/220, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    5. Akgün, Uğur & Caffarra, Cristina & Etro, Federico & Stillman, Robert, 2020. "On the welfare impact of mergers of complements: Raising rivals’ costs versus elimination of double marginalization," Economics Letters, Elsevier, vol. 195(C).
    6. Moresi, Serge & Schwartz, Marius, 2021. "Vertical mergers with input substitution: Double marginalization, foreclosure and welfare," Economics Letters, Elsevier, vol. 202(C).
    7. Jeitschko, Thomas D. & Kim, Soo Jin & Yankelevich, Aleksandr, 2021. "Zero-Rating and Vertical Content Foreclosure," Information Economics and Policy, Elsevier, vol. 55(C).
    8. Habiger, Peter & Kopel, Michael, 2020. "Strategic delegation in successive oligopolies with differentiated firms," Economics Letters, Elsevier, vol. 194(C).
    9. Luciano Fanti & Marcella Scrimitore, 2017. "The endogeneous choice of delegation in a duopoly with outsourcing to the rival," Discussion Papers 2017/219, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    10. Serge Moresi & Serge Moresi & Marius Schwartz, 2021. "Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare," Working Papers gueconwpa~21-21-03, Georgetown University, Department of Economics.
    11. Yoonho Choi & E. Kwan Choi, 2021. "Selling High-Tech Inputs to the Enemy," CESifo Working Paper Series 8886, CESifo.
    12. Luciano Fanti & Marcella Scrimitore, 2017. "How to compete? Cournot vs. Bertrand in a vertical structure with an integrated input supplier," Discussion Papers 2017/221, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    13. Chul-Hi Park & Toshihiro Matsumura & Sang-Ho Lee, 2022. "Procurement of advanced inputs and welfare-reducing vertical integration," Journal of Economics, Springer, vol. 135(3), pages 255-283, April.
    14. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2019. "Vertical integration and knowledge disclosure," Economics Letters, Elsevier, vol. 177(C), pages 9-13.
    15. Choi, Yoonho & Choi, E. Kwan, 2021. "Selling high-tech inputs to the enemy," International Journal of Production Economics, Elsevier, vol. 234(C).
    16. Luciano Fanti & Marcella Scrimitore, 2019. "How to Compete? Cournot versus Bertrand in a Vertical Structure with an Integrated Input Supplier," Southern Economic Journal, John Wiley & Sons, vol. 85(3), pages 796-820, January.

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    More about this item

    Keywords

    Strategic competition against customers; Vertical delegation;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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