Abstract
We analyze the effect of downstream competition (or cooperation) in the presence of decentralized bargaining between two downstream firms and an upstream monopolist over a two-part tariff input price. The major findings are as follows: (i) the relationship between the profits of the upstream monopolist (resp. the downstream firms) and the intensity of competition is U-shaped (resp. inverted U-shaped), irrespective of the competition modes in the downstream product market; (ii) if the intensity of competition is sufficiently high, the downstream firms’ profits are higher under Bertrand competition, whereas if the intensity of competition is sufficiently low, the downstream firms’ profits are higher under Cournot competition; and (iii) a market under Cournot competition is more efficient than a market under Bertrand competition, in the sense that both consumer surplus and social welfare are higher in the case of the former.
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Notes
In China, the smartphone market is a competitive market. For example, HUAWEI and XIAOMI are two large smartphone manufacturers that both buy their LCD screens from the BOE Technology Group Co., Ltd. The two smartphone manufacturers are not merely waging a price war—they are also increasing their output and gaining market share (Zhou 2017).
In the existing literature, the effects of competition between downstream rivals have not been considered when the upstream firm is a monopoly. Symeonidis (2008, 2010) analyzed the effects of downstream rivals’ competition where each of the two firms bargains with its respective upstream agent. In reality, there are many upstream monopoly firms providing intermediate products for downstream firms, such as in the chip industry, engine industry, etc. Hence, it is worthwhile to explore the effects of the intensity of downstream competitiveness on the market where the upstream firm is a monopoly.
Ziss (1995) showed that under certain conditions, a downstream merger between duopolists will lead to higher output when upstream suppliers set two-part tariffs. Fershtman and Pakes (2000) showed that the positive effect of collusion on the short-run decision variables of variety and quality more than compensates consumers for the negative effect of collusive prices, so that consumer surplus is larger with collusion.
We would like to thank an anonymous referee for drawing our attention to this issue. Our assumption is different from that of Basak and Mukherjee 2017, who assume that a negative input price is not economically viable. As the per-unit input price is chosen to maximize the joint profits of the upstream and downstream firms, it is reasonable for the upstream firm to subsidize its downstream customers.
It is true that the number of firms is crucial for this type of model because of the intensity of competitiveness. We have also calculated the case of three downstream firms and the basic conclusion of this paper remains valid. However, we only report the equilibrium result for a scenario of two downstream firms in this paper, mainly because the complexity of the analysis increases exponentially with the number of downstream firms.
Escrihuela-Villar (2015) demonstrated the equivalence of the conjectural variations solution and the coefficient of cooperation.
See Symeonidis (2008, p. 261) for more on \( \lambda \in \left[ {0,1} \right] \) and for an explanation of why the unit price decreases and the fixed fee increases in \( \lambda \).
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Acknowledgements
We would like to acknowledge financial support from the key project of the National Social Science Foundation of China (17ZDA04), the project of the National Social Science Foundation of China (15BJL087), and the Fundamental Research Funds for the Central Universities (15JNYH001). The authors wish to thank the Editor-in-Chief, Giacomo Corneo, and two anonymous referees for their valuable and constructive comments. The usual disclaimers apply.
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Wang, X., Li, J. Downstream rivals’ competition, bargaining, and welfare. J Econ 131, 61–75 (2020). https://doi.org/10.1007/s00712-018-0644-y
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DOI: https://doi.org/10.1007/s00712-018-0644-y