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Opportunism in Vertical Contracting: A Dynamic Perspective

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  • Miklos-Thal, Jeanine
  • Do, Jihwan

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.

Suggested Citation

  • Miklos-Thal, Jeanine & Do, Jihwan, 2022. "Opportunism in Vertical Contracting: A Dynamic Perspective," CEPR Discussion Papers 16951, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16951
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    More about this item

    Keywords

    Vertical contracting; Opportunism; Dynamic oligopoly; Vertical mergers; Vertical restraints;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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