Vertical Contract and Competition Intensity in Hotelling’s Model

Wang Xingtang (), Li Jie and Wang Leonard F.S. ()
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Wang Xingtang: Institute of Industrial Economics, Jinan University, Guangzhou, China
Li Jie: Institute of Industrial Organization and Regulation, Institute of Industrial Economics, Jinan University, Guangzhou, Guangdong, China
Wang Leonard F.S.: Wenlan School of Business, Zhongnan University of Economics and Law, Wuhan, China

The B.E. Journal of Theoretical Economics, 2019, vol. 19, issue 1, 6

Abstract: This paper explores the impact of intensity of rivalry in downstream market on the equilibrium locations of the downstream firms under a vertical market structure á la Hotelling. We find that: (i) the presence of upstream firms softens the spatial competition in downstream market; (ii) minimum differentiation cannot be achieved as the equilibrium outcome and the equilibrium product differentiation is insufficient relative to socially optimum; (iii) social welfare is higher with a higher weight attached to intensity of rivalry, which is different from the non-monotonic relationship under the horizontal market case; (iv) the equilibrium product differentiation is independent of bargaining power under the two-part tariff contracts, which is different from Brekke and Straume (2004) under linear pricing.

Keywords: spatial competition; vertical structure; maximum (minimum) differentiation; intensity of rivalry (search for similar items in EconPapers)
JEL-codes: D43 L13 L22 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejte-2017-0048

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