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Vertical Contract and Competition Intensity in Hotelling’s Model

Author

Listed:
  • Wang Xingtang

    (Institute of Industrial Economics, Jinan University, Guangzhou, China)

  • Li Jie

    (Institute of Industrial Organization and Regulation, Institute of Industrial Economics, Jinan University, Guangzhou, Guangdong, China)

  • Wang Leonard F.S.

    (Wenlan School of Business, Zhongnan University of Economics and Law, Wuhan, China)

Abstract

This paper explores the impact of intensity of rivalry in downstream market on the equilibrium locations of the downstream firms under a vertical market structure á la Hotelling. We find that: (i) the presence of upstream firms softens the spatial competition in downstream market; (ii) minimum differentiation cannot be achieved as the equilibrium outcome and the equilibrium product differentiation is insufficient relative to socially optimum; (iii) social welfare is higher with a higher weight attached to intensity of rivalry, which is different from the non-monotonic relationship under the horizontal market case; (iv) the equilibrium product differentiation is independent of bargaining power under the two-part tariff contracts, which is different from Brekke and Straume (2004) under linear pricing.

Suggested Citation

  • Wang Xingtang & Li Jie & Wang Leonard F.S., 2019. "Vertical Contract and Competition Intensity in Hotelling’s Model," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-6, January.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:1:p:6:n:11
    DOI: 10.1515/bejte-2017-0048
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    References listed on IDEAS

    as
    1. Gu, Yiquan & Wenzel, Tobias, 2009. "A note on the excess entry theorem in spatial models with elastic demand," International Journal of Industrial Organization, Elsevier, vol. 27(5), pages 567-571, September.
    2. Giovanni Maggi & Andres Rodriguez-Clare, 1998. "The Value of Trade Agreements in the Presence of Political Pressures," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 574-601, June.
    3. Toshihiro Matsumura & Makoto Okamura, 2015. "Competition and privatization policies revisited: the payoff interdependence approach," Journal of Economics, Springer, vol. 116(2), pages 137-150, October.
    4. Anderson, Simon P. & de Palma, Andre, 2000. "From local to global competition," European Economic Review, Elsevier, vol. 44(3), pages 423-448, March.
    5. Matsushima, Noriaki, 2004. "Technology of upstream firms and equilibrium product differentiation," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1091-1114, November.
    6. Kou, Zonglai & Zhou, Min, 2015. "Hotelling’s competition with relative performance evaluation," Economics Letters, Elsevier, vol. 130(C), pages 69-71.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    spatial competition; vertical structure; maximum (minimum) differentiation; intensity of rivalry;
    All these keywords.

    JEL classification:

    • 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
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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