Endogenous Choice of Price or Quantity Contract with Upstream R&D Investment: Linear Pricing and Two-part Tariff Contract with Bargaining

DongJoon Lee, Kangsik Choi and Tatsuhiko Nariu

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the endogenous choice of strategic variable (a price or a quantity) by downstream firms in a two-tier industry in which an upstream firm performs the R&D investment. We show that when the upstream firm offers either linear discriminatory or uniform input price, it is a dominant strategy for each downstream firm to choose Bertrand competition when two products become relatively differentiated. Second, from the viewpoint of downstream firms, we show that Bertrand competition is more efficient than Cournot competition in some boundaries of Cournot equilibrium, which implies that each downstream firm faces a prisoners' dilemma under the Cournot equilibrium. However, when the downstream firms involve in centralized bargaining with an upstream firm to determine the two-part tariff discriminatory (uniform) input pricing contracts, we find that choosing price (quantity) contract is the dominant strategy for downstream firms. In this case, we further show that the level of social welfare is the same regardless of the mode of product market competition (i.e., Bertrand or Cournot).

Keywords: Endogenous Choice; Bertrand competition; Cournot competition; Upstream Investment; Bargaining (search for similar items in EconPapers)
JEL-codes: D43 L13 M21 (search for similar items in EconPapers)
Date: 2016-07-22
New Economics Papers: this item is included in nep-bec, nep-com and nep-cse
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