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The Nash bargaining solution in vertical relations with linear input prices

Hamid Aghadadashli, Markus Dertwinkel-Kalt () and Christian Wey ()

No 224, DICE Discussion Papers from University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: We re-examine the Nash bargaining solution when an upstream and a downstream firm bargain over a linear input price. We show that the profit sharing rule is given by a simple and instructive formula which depends on the parties' disagreement payoffs, the profit weights in the Nash-product and the elasticity of derived demand. A downstream firm's profit share increases in the equilibrium derived demand elasticity which in turn depends on the final goods' demand elasticity. Our simple formula generalizes to bargaining with N downstream firms when bilateral contracts are unobservable.

Keywords: Nash Bargaining; Demand Elasticity (search for similar items in EconPapers)
JEL-codes: L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cta, nep-ger, nep-gth and nep-mic
Date: 2016
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