Upstream capacity constraint and the preservation of monopoly power in private

Eric Avenel

Description

Niveau: Supérieur, Doctorat, Bac+8
Upstream capacity constraint and the preservation of monopoly power in private bilateral contracting Eric Avenel Université de Rennes I et CREM (UMR CNRS 6211) March 12, 2010 Abstract This article presents a model of private vertical contracting with a ca- pacity constrained monopolistic supplier. I consider ?full capacity beliefs? that are consistent with an upstream capacity constraint and are ?wary? when the constraint is tight or production is costless. I show that, facing a capacity constraint, the supplier may preserve its monopoly power in equilibrium. This result stands in sharp contrast to the standard result that the supplier cannot preserve its monopoly power, which holds under the usual implicit assumption of an in?nite production capacity. 1 Introduction It is a well-established result in the literature on vertical contracting that when an upstream monopolist (the ?supplier?) contracts bilaterally and privately with two (or more) competing downstream ?rms (the ?retailers?), it is not able to pre- serve its market power and induce the monopoly outcome on the downstream market (Hart and Tirole (1990), McAfee and Schwartz (1994), Segal (1999), Rey and Tirole (2007)). This results from the monopolist?s inability to commit to a given set of contracts, which is a consequence of the assumption that o?ers are secret. With public o?ers, the monopolist is able to eliminate competition be- tween retailers through manipulations of wholesale prices, typically raising these prices.

• beliefs equilibria


• production capacity


• when


• vertical contracting game


• beliefs must


• capacity constraint


• any system


• beliefs

Sujets

• Avenel
• Université de Rennes I
• Belief

Informations

• Publié par: profil-zyak-2012
• Nombre de lectures: 36
• Langue: English

Extrait

Upstreamcapacityconstraintandthe preservationofmonopolypowerinprivate bilateralcontracting EricAvenel UniversitédeRennesIetCREM(UMRCNRS6211)  March12,2010 Abstract Thisarticlepresentsamodelofprivateverticalcontractingwithaca- pacityconstrainedmonopolisticsupplier.Iconsider‘fullcapacitybeliefs’ thatareconsistentwithanupstreamcapacityconstraintandare‘wary’ whentheconstraintistightorproductioniscostless.Ishowthat,facing acapacityconstraint,thesuppliermaypreserveitsmonopolypowerin equilibrium.Thisresultstandsinsharpcontrasttothestandardresult thatthesuppliercannotpreserveitsmonopolypower,whichholdsunder theusualimplicitassumptionofanin…niteproductioncapacity. 1Introduction Itisawell-establishedresultintheliteratureonverticalcontractingthatwhen anupstreammonopolist(the’supplier’)contractsbilaterallyandprivatelywith two(ormore)competingdownstream…rms(the’retailers’),itisnotabletopre- serveitsmarketpowerandinducethemonopolyoutcomeonthedownstream market(HartandTirole(1990),McAfeeandSchwartz(1994),Segal(1999),Rey andTirole(2007)).Thisresultsfromthemonopolist’sinabilitytocommittoa givensetofcontracts,whichisaconsequenceoftheassumptionthato¤ersare secret.Withpublico¤ers,themonopolistisabletoeliminatecompetitionbe- tweenretailersthroughmanipulationsofwholesaleprices,typicallyraisingthese prices.However,theequilibriumsetofpubliccontractsisnotanequilibrium ofthegamewithsecretcontractsbecausethemonopolisthasanincentiveto deviateando¤ertooneofthedownstream…rmsalowerwholesaleprice.While theassumptionofpubliccontractsmaymakesenseinsomespeci…csituations, forexamplebecausethelawprohibitso¤eringdi¤erentcontractstodi¤erent …rms,itisingeneraldi¢culttojustify.So,weareleftwiththisuncomfortable  Address:7placeHoche,F-35000Rennes,FRANCE.Email:[e-mail] 1