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Favoritism in Vertical Relationship: Input Prices and Access Quality

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  • Ngo Van Long
  • Antoine Soubeyran

Abstract

Favoritism in vertical relationship is a situation in which an upstream firm sets favorable exchange conditions to some agents at the expense of others. This paper explores the reason for, and direction of, favoritism in the vertical relationship between an upstream firm and a number of downstream firms that are Cournot rivals relying on the inputs provided by the upstream firm. We show that favoritism may arise from profit maximization. We address the following questions: (i) if the upstream firm can charge different prices to different downstream firms, will it treat the less efficient firms more favorably? (ii) if the upstream firm can provide different levels of quality of access to several ex ante identical downstream firms, will it provide a uniform quality of access? We show that the answer to (i) depends on whether downstream firms can self-supply, and we characterize the structure of favors. As for (ii), we show that among ex-ante equal firms, some firms will be selected for favorable treatment. On étudie le favoritisme qui existe dans la relation verticale entre une firme à l'amont et plusieurs firmes à l'aval. On démontre que le favoritisme est le résultat de la maximisation de profit. On considère les questions suivantes. Premièrement, si la firme à l'amont peut fixer des prix différents pour le même produit qu'elle vend aux firmes à l'aval, est-ce qu'elle traite mieux les firmes qui sont moins efficaces? Deuxièmement, si la firme à l'amont peut offrir aux firmes à l'aval des niveaux de qualité d'accès à son réseau, est-ce que la qualité sera uniforme? La réponse à la première question dépend de l'aptitude de l'auto-provision des firmes à l'aval. Quant à la deuxième question, on montre que certaines firmes sont favorisées.

Suggested Citation

  • Ngo Van Long & Antoine Soubeyran, 2003. "Favoritism in Vertical Relationship: Input Prices and Access Quality," CIRANO Working Papers 2003s-14, CIRANO.
  • Handle: RePEc:cir:cirwor:2003s-14
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    File URL: http://www.cirano.qc.ca/files/publications/2003s-14.pdf
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    References listed on IDEAS

    as
    1. Ngo Van Long & Antoine Soubeyran, 1998. "Pollution, Pigouvian Taxes, and Asymmetric International Oligopoly," CIRANO Working Papers 98s-30, CIRANO.
    2. Van Long, N. & Soubeyran, A., 1997. "Cost Manipulation in an Asymmetric Oligopoly: The Taxation Problem," ASSET - Instituto De Economia Publica 173, ASSET (Association of Southern European Economic Theorists).
    3. Salop, Steven C & Scheffman, David T, 1987. "Cost-Raising Strategies," Journal of Industrial Economics, Wiley Blackwell, vol. 36(1), pages 19-34, September.
    4. W. Salant, Stephen & Shaffer, Greg, 1998. "Optimal asymmetric strategies in research joint ventures," International Journal of Industrial Organization, Elsevier, vol. 16(2), pages 195-208, March.
    5. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    6. Van Long, N. & Soubeyran, A., 1997. "Cost Manipulation in Oligopoly: A Duality Approach," ASSET - Instituto De Economia Publica 174, ASSET (Association of Southern European Economic Theorists).
    7. Long, Ngo Van & Soubeyran, Antoine, 2001. "Cost Manipulation Games in Oligopoly, with Costs of Manipulating," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 505-533, May.
    8. Greg Shaffer & Stephen W. Salant, 1999. "Unequal Treatment of Identical Agents in Cournot Equilibrium," American Economic Review, American Economic Association, vol. 89(3), pages 585-604, June.
    9. Gérard Gaudet & Stephen W. Salant, 1991. "Uniqueness of Cournot Equilibrium: New Results From Old Methods," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 399-404.
    10. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-167, March.
    11. John Vickers, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 1-17.
    12. DeGraba, Patrick, 1990. "Input Market Price Discrimination and the Choice of Technology," American Economic Review, American Economic Association, vol. 80(5), pages 1246-1253, December.
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    More about this item

    Keywords

    Vertical Relationship; Input Pricing; Access Quality; Oligopoly; Relation verticale; le prix des inputs; la qualité d'accès; oligopole;

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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