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The Optimal Trading Partner for an Upstream Monopolist

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  • Yamada, Mai

Abstract

We examine an optimal trading partner for an upstream monopolist, an input supplier, in a situation in which the intensity of market competition depends on trading partner choice. The upstream monopolist supplies the input to either the incumbent or the entrant. We assume only incumbent has the outside option which it can make the input by itself and then produces the final product. On the other hand, the entrant does not have the outside option. If the upstream firm chooses the incumbent as its trading partner, it can have a bilateral monopoly relationship with the incumbent. If the upstream firm chooses the entrant as its trading partner, it faces downstream competition. We show trading with the entrant can yield greater profits for the upstream monopolist than trading with the incumbent. Thus, the upstream monopolist has incentives to encourage downstream competition through its trading partner choice. Our paper suggests that the existence of the incumbent's outside option encourages new entry into the downstream market.

Suggested Citation

  • Yamada, Mai, 2016. "The Optimal Trading Partner for an Upstream Monopolist," MPRA Paper 70325, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:70325
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    References listed on IDEAS

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    More about this item

    Keywords

    Upstream monopolist; Trading partner choice; Bargaining game; Profits; Outside Option;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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