Oligopolistic Upstream Competition with Differentiated Inputs

We consider a vertical supply chain that consists of a downstream final good producer and n >= 2 upstream intermediate good producers. The final good producer transforms the n differentiated inputs into an output good via a CES production function and sells the composed good to the final consumers. We study the impact of upstream price and upstream quantity competition on the supply chain. We find that the intermediate good producers prefer price over quantity competition when the inputs are complements and vice versa when they are substitutes. However, the final good producer and the consumers prefer price over quantity competition for all degrees of input differentiation. We additionally observe that the welfare optimal solution materializes when a horizontally integrated upstream market merges vertically with the downstream producer.