Vertical Contracts and Downstream Entry*
Articles
Overview
published in
- JOURNAL OF INDUSTRIAL ECONOMICS Journal
publication date
- March 2024
issue
- 1
volume
- 72
Digital Object Identifier (DOI)
International Standard Serial Number (ISSN)
- 0022-1821
Electronic International Standard Serial Number (EISSN)
- 1467-6451
abstract
- 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.