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Price-Dependent Profit Sharing as an Escape from the Bertrand Paradox

Author

Listed:
  • Oystein Foros
  • Kare P. Hagen
  • Hans Jarle Kind

Abstract

In this paper we show how an upstream firm can prevent destructive competition among downstream firms producing relatively close substitutes by implementing a price-dependent profit-sharing rule. The rule also ensures that the downstream firms undertake investments which benefit the industry in aggregate. The model is consistent with observations from the market for content commodities distributed by mobile networks.

Suggested Citation

  • Oystein Foros & Kare P. Hagen & Hans Jarle Kind, 2007. "Price-Dependent Profit Sharing as an Escape from the Bertrand Paradox," CESifo Working Paper Series 1927, CESifo.
    • Handle: RePEc:ces:ceswps:_1927
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp1927.pdf
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    References listed on IDEAS

    as
    1. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
    2. Dana, James D, Jr & Spier, Kathryn E, 2001. "Revenue Sharing and Vertical Control in the Video Rental Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 223-245, September.
    3. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    4. James D. Dana, Jr. & Kathryn E. Spier, 2001. "Revenue Sharing and Vertical Control in the Video Rental Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 223-245, September.
    5. Gérard P. Cachon & Martin A. Lariviere, 2005. "Supply Chain Coordination with Revenue-Sharing Contracts: Strengths and Limitations," Management Science, INFORMS, vol. 51(1), pages 30-44, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    profit-sharing; vertical restraints; investments; competition;
    All these keywords.

    JEL classification:

    • 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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