Accommodation effects in successive Cournot Oligopolies

Christos Constantatos and Ioannis Pinopoulos

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: When a vertically integrated firm competes against non integrated rivals in the input and the final-good markets, the layman's belief is that, when the non-integrated downstream firms purchase part of their input from the up- stream division of the integrated firm, the downstream division will compete less aggressively, in order to enhance the input sales of its partner. However, most "standard" market interface models of successive Cournot duopolies they ignore this softening of downstream competition. We show that, when input purchases are allowed to flow continuously, the downstream accommodation effect exists. Even if the upstream firms de- cide their quantities in advance, the input and final-good markets must clear simultaneously. This, together with Cournot competition in the upstream market imply that, input quantities supplied are observable, but at the mo- ment the independent downstream ?rm makes its final output decision, the input price cannot be determined yet, otherwise the independent seller is leader in the final-good market. Even, though, the downstream division of the integrated ?rm cannot by its behavior increase the sales of its upstream partner, it can increase the market-clearing price at which the input will be sold. Considering this effect shows that ?nal-good prices are higher than expected by standard models.

Keywords: Vertically related markets; vertical integration; market in- terface; accommodation effect; product differentiation. (search for similar items in EconPapers)
JEL-codes: L22 L4 (search for similar items in EconPapers)
Date: 2013-12, Revised 2013-12
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