On the choice of contract types in vertical relations

This paper studies a Stackelberg game among the downstream firms in a vertical industry where one-way R&D spillovers occur, from the leader to the follower. When the upstream market is perfectly competitive under certain conditions the standard first-mover advantages disappear. When we move to the upstream monopolistic case we find that despite the existence of spillovers in most of the cases, the leader gets higher profits and thus first-mover advantages are reinstated due to the price setting behavior of the upstream firm. It therefore challenges to some extent the “naive” idea that under one-way spillovers there are no incentives for early movers.

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Information Acquisition in Vertical Relations

SSRN Electronic Journal ◽

10.2139/ssrn.2723919 ◽

2016 ◽

Author(s):

Pio Baake ◽

Andreas Harasser ◽

Friederike Heiny

Keyword(s):

Information Acquisition ◽

Vertical Relations

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Beliefs and Consumer Search in a Vertical Industry

Journal of the European Economic Association ◽

10.1093/jeea/jvz046 ◽

2019 ◽

Vol 18 (5) ◽

pp. 2359-2393 ◽

Cited By ~ 1

Author(s):

Maarten Janssen ◽

Sandro Shelegia

Keyword(s):

Low Cost ◽

Search Costs ◽

Retail Price ◽

Consumer Search ◽

Common Assumption ◽

Vertical Relations ◽

Retail Prices ◽

The Common ◽

Search Market ◽

Pass Through

Abstract This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers hold the upstream manufacturer at least partially responsible for the deviation, equilibrium predictions are qualitatively different. For robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), nonmonotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.

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