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Strategic Incentives When Supplying to Rivals

Serge Moresi () and Marius Schwartz
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Serge Moresi: Charles River Associates, Inc., Washington DC

No gueconwpa~15-15-05, Working Papers from Georgetown University, Department of Economics

Abstract: We consider an unregulated, vertically integrated input monopolist that supplies to a differentiated downstream rival. With linear input pricing, the integrated firm unambiguously wants to induce expansion by the rivalÑthe opposite incentive from that in standard oligopoly settings with no supply relationship, even though the downstream competition effect is still present here. This result holds whether downstream competition involves prices or quantities and strategic substitutes or complements. If the firm charges a two-part tariff for the input, the result continues to hold under Bertrand competition in the ÒnormalÓ case of prices as strategic complements, but is reversed for Cournot and strategic substitutes. We analyze one mechanism for influencing the independent downstream firm, vertical delegation, whereby the integrated firm charges its downstream unit an observable input price, and the downstream unit does not treat that price as a pure internal transfer. Vertical delegation is shown to dominate centralized behavior by the integrated firm, and we characterize how the input price should be set in order to alter the independent firmÕs choice depending on the specifics of downstream competition.

Keywords: Strategic Competition Against Customers; Vertical Delegation (search for similar items in EconPapers)
JEL-codes: L13 D43 L14 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-com
Date: 2015-06-15
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