Vertical Contracts and Entry
27 Pages Posted: 10 Sep 2020 Last revised: 12 Sep 2020
Date Written: September 1, 2020
We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two-part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.
Keywords: vertical contracting; downstream entry; two-part tariffs; wholesale price contracts; bargaining
JEL Classification: D43; L11; L14; L22; L42; L81
Suggested Citation: Suggested Citation