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Upstream Capacity Constraint and the Preservation of Monopoly Power in Private Bilateral Contracting

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  • Eric Avenel

Abstract

This article presents a model of private vertical contracting with a capacity constrained monopolistic supplier. I consider 'full capacity beliefs' that are consistent with an upstream capacity constraint and are 'wary' when the constraint is tight or production is costless. I show that, facing a capacity constraint, the supplier may preserve its monopoly power in equilibrium. This result stands in sharp contrast to the standard result that the supplier cannot preserve its monopoly power, which holds under the usual implicit assumption of an infinite production capacity.
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Suggested Citation

  • Eric Avenel, 2012. "Upstream Capacity Constraint and the Preservation of Monopoly Power in Private Bilateral Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 578-598, December.
    • Handle: RePEc:bla:jindec:v:60:y:2012:i:4:p:578-598
    DOI: 10.1111/joie.2012.60.issue-4
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    Cited by:

    1. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    2. Johan Hombert & Jérôme Pouyet & Nicolas Schutz, 2019. "Anticompetitive Vertical Merger Waves," Journal of Industrial Economics, Wiley Blackwell, vol. 67(3-4), pages 484-514, September.
    3. Nicolas Pasquier & Olivier Bonroy & Alexis Garapin, 2022. "Risk aversion and equilibrium selection in a vertical contracting setting: an experiment," Theory and Decision, Springer, vol. 93(4), pages 585-614, November.
    4. Moellers, Claudia & Normann, Hans-Theo & Snyder, Christopher M., 2017. "Communication in vertical markets: Experimental evidence," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 214-258.
    5. Michele Bisceglia, 2023. "Vertical Contract Disclosure in Three‐Tier Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 71(1), pages 1-46, March.
    6. Éric Avenel & Clémence Christin, 2011. "Equilibrium strategic overbuying," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201205, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    7. Cong Pan, 2018. "Supplier Encroachment and Consumer Welfare: Upstream Firm’s Opportunism and Multichannel Distribution," ISER Discussion Paper 1020, Institute of Social and Economic Research, Osaka University.
    8. Eguia, Jon X. & Llorente-Saguer, Aniol & Morton, Rebecca & Nicolò, Antonio, 2018. "Equilibrium selection in sequential games with imperfect information," Games and Economic Behavior, Elsevier, vol. 109(C), pages 465-483.
    9. Emanuele Bacchiega & Olivier Bonroy, 2021. "Secret contracting and Nash-in-Nash bargaining," SN Business & Economics, Springer, vol. 1(11), pages 1-7, November.
    10. Jeanine Miklós-Thal & Greg Shaffer, 2016. "Naked Exclusion with Private Offers," American Economic Journal: Microeconomics, American Economic Association, vol. 8(4), pages 174-194, November.
    11. Lømo, Teis Lunde, 2015. "Risk sharing mitigates opportunism in vertical contracting," Working Papers in Economics 10/15, University of Bergen, Department of Economics.
    12. Eric Avenel, 2012. "Suppliers’ Merger and Consumers' Welfare," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 15(1), pages 1-21, Summer.

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