Quantity versus price competition in a vertically related market with sequential contracts

ABSTRACT

The study aims to re-examine the results of quantity and price competition. I consider a vertically related market where one upstream firm sequentially contracts with two downstream firms. I find that consumer surplus and social welfare under quantity competition can be higher than those under price competition. Under price competition with sequential contracting, an upstream firm offers a high wholesale price to a downstream firm contracted later, to help a downstream firm contracted earlier. The downstream firm contracted earlier anticipates this and sets a high retail price. Because prices are strategic complements, the downstream firm contracted later also sets a high retail price. Hence, competition in the downstream sector is softer under price competition, and the rankings of consumer surplus and social welfare can be reversed.

KEYWORDS:

• Cournot competition
• Bertrand competition
• sequential contract
• supply chain

JEL CLASSIFICATION:

• D43
• L13
• L14

Acknowledgments

I am grateful to the editor and two anonymous referees for their comments, which significantly improve the study. I am also grateful to Tomomichi Mizuno for his helpful and valuable comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ One exception is Arya, Mittendorf, and Sappington (2008a), who consider a market where a vertically integrated firm exists; they show that consumer surplus and social welfare can be lower under price competition.

² Basak and Mukherjee (2017) show that if we assume a nonnegative wholesale price in Alipranti, Milliou, and Petrakis (2014), the rankings are not reversed.

³ Although they assume that downstream firms simultaneously choose their quantities, the present study assumes that one downstream firm decides its quantity before an upstream firm contracts with the other downstream firm.