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On Intrabrand and Interbrand Competition: The Strategic Role of Fees and Royalties

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  • Saggi, Kamal
  • Vettas, Nikolaos

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2110.

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Date of creation: Mar 1999
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Handle: RePEc:cpr:ceprdp:2110

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Keywords: intrabrand competition; royalties; strategic contracting; two-part tariffs;

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References

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  1. Saggi, Kamal & Vettas, Nikolaos, 2002. "On intrabrand and interbrand competition: The strategic role of fees and royalties," European Economic Review, Elsevier, vol. 46(1), pages 189-200, January.
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  8. Stephen Polasky, 1993. "Divide And Conquer: On The Profitability Of Forming Independent Rival Divisions," Boston College Working Papers in Economics 210, Boston College Department of Economics.
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  11. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  12. Baye, Michael R & Crocker, Keith J & Ju, Jiandong, 1996. "Divisionalization, Franchising, and Divestiture Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 86(1), pages 223-36, March.
  13. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  14. Katz, Michael L., 1989. "Vertical contractual relations," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 11, pages 655-721 Elsevier.
  15. Kamien, Morton I & Tauman, Yair, 1986. "Fees versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 471-91, August.
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Citations

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Cited by:
  1. Eichberger, Jürgen & Mueller-Langer, Frank, 2012. "On the Welfare Effects of Exclusive Distribution Arrangements," MPRA Paper 39691, University Library of Munich, Germany.
  2. Konishi, Hideo & Sandfort, Michael T., 2003. "Anchor stores," Journal of Urban Economics, Elsevier, vol. 53(3), pages 413-435, May.
  3. Saggi, Kamal & Vettas, Nikolaos, 1999. "On Intrabrand and Interbrand Competition: The Strategic Role of Fees and Royalties," Working Papers 99-06, Duke University, Department of Economics.
  4. Milliou, Chrysovalantou & Petrakis, Emmanuel & Vettas, Nikolaos, 2003. "Endogenous Contracts Under Bargaining in Competing Vertical Chains," CEPR Discussion Papers 3976, C.E.P.R. Discussion Papers.
  5. Rafael MONER-COLONQUES & José J. SEMPERE-MONERRIS & Amparo URBANO, 2002. "The Manufacturers’ Choice of Brand Policy under Successive Duopoly," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002003, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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