Alternative Forms of Buyer Power in a Vertical Duopoly: Implications for profits and consumer welfare

Aditya Bhattacharjea and Srishti Gupta

No 326, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: We derive several variations of a model in which two upstream firms supply a differentiated product to two downstream firms under exclusive contracts of different kinds. We first derive a benchmark model with upstream first-mover pricing. We then compare its outcomes with four other types of vertical arrangements representing different modes of exploiting buyer power: downstream first mover pricing; Nash bargaining, alternatively with linear and two-part tariffs; and vertical integration. In each case, we show how the equilibrium values of wholesale and retail prices as well as downstream firms’ profits are affected by changes in the exogenous parameters (degree of product differentiation, bargaining power, and production costs). We evaluate the various vertical regimes from the perspective of downstream firms’ profits as well as consumer welfare, and show how more powerful downstream firms can benefit consumers by exercising “countervailing power” against upstream firms. Key Words: Buyer power, Bertrand duopoly, Vertical contracts, Nash bargaining, Vertical integration. JEL Codes: D43, L13, L22

Pages: 51 pages
Date: 2022-07
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth, nep-ind, nep-mic and nep-reg
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