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Vertical Contracting When Competition for Orders Precedes Procurement

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Author Info
Joshua S Gans

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Abstract

This paper reverses the standard order between input supply negotiations and downstream competition and assumes that competition for orders takes place prior to procurement of inputs in a vertical chain. In an environment where procurement negotiations involve no private information and no restrictions on the form of pricing, it is found that oligopolistically competitive outcomes will result despite the presence of an upstream monopolist. It is demonstrated that vertical integration is a means by which the monopolist can leverage its market power downstream to the detriment of consumers. However, it does so, not by foreclosing on independent downstream firms, but by softening the competitive behaviour of its own integrated units. Thus, the paper provides a simple rationale for anti-competitive vertical integration in an environment that respects the usual Chicago school assumptions

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 123.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:123

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Related research
Keywords: vertical contracting vertical integration monopolisation bargaining competition

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Find related papers by JEL classification:
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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References listed on IDEAS
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  1. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
    Other versions:
  2. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn. [Downloadable!] (restricted)
  3. Morton I. Kamien & Lode Li & Dov Samet, 1989. "Bertrand Competition with Subcontracting," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 553-567, Winter. [Downloadable!] (restricted)
  4. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  5. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  6. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March. [Downloadable!] (restricted)
  7. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May. [Downloadable!] (restricted)
  8. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-42, March. [Downloadable!] (restricted)
  9. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March. [Downloadable!] (restricted)
  10. Waterson, Michael, 1980. "Price-Cost Margins and Successive Market Power," The Quarterly Journal of Economics, MIT Press, vol. 94(1), pages 135-50, February. [Downloadable!] (restricted)
  11. Kathryn E. Spier & Michael D. Whinston, 1995. "On the Efficiency of Privately Stipulated Damages for Breach of Contract: Entry Barriers, Reliance, and Renegotiation," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 180-202, Summer. [Downloadable!] (restricted)
  12. REY, Patrick & TIROLE, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005. [Downloadable!]
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  13. Ilya Segal & Michael D. Whinston, 2000. "Exclusive Contracts and Protection of Investments," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 603-633, Winter.
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