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On the choice of contract types in vertical relations

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  • Christos Constantatos
  • Ioannis N. Pinopoulos

Abstract

We endogenize the contract‐type choice in a vertically related market. We relate that choice to the distribution of bargaining power between the upstream and downstream partner in contract‐terms negotiation. For two wide classes of demand functions, the upstream (downstream) firm prefers a two‐part tariff (linear) contract, and thus, we model the contract‐type choice as a noncooperative game. When a firm has strong bargaining power over the contract terms, risk dominance selects its least‐preferred contract type: the strong firm has more to lose in case of disagreement over the contract type. Under relative symmetry in bargaining power, risk dominance selects the efficient two‐part tariff.

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  • Christos Constantatos & Ioannis N. Pinopoulos, 2021. "On the choice of contract types in vertical relations," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 531-538, April.
    • Handle: RePEc:wly:mgtdec:v:42:y:2021:i:3:p:531-538
    DOI: 10.1002/mde.3261
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    Cited by:

    1. Ismail Saglam, 2023. "Centralized bargaining with pre‐donation in a vertically related industry," Manchester School, University of Manchester, vol. 91(3), pages 233-259, June.

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