Price vs. quantity competition in a vertically related market revisited

In a recent paper, Alipranti et al. (2014) show that, in a vertically related market, Cournot competition yields higher social welfare than Bertrand competition if the upstream firm subsidises the downstream firm’s production via negative wholesale input prices. However, the assumption of a negative...

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Bibliographic Details
Published inEconomics letters Vol. 153; pp. 12 - 14
Main Authors Basak, Debasmita, Mukherjee, Arijit
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.04.2017
Elsevier Science Ltd
Subjects
Bargaining
Bertrand
Competition
Cournot
Economic models
Studies
Two-part tariffs
Vertical markets
Vertical pricing
Welfare
Welfare economics
D43
Welfare
Bargaining
Bertrand
Two-part tariffs
Cournot
L14
L13
Vertical pricing
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Summary:In a recent paper, Alipranti et al. (2014) show that, in a vertically related market, Cournot competition yields higher social welfare than Bertrand competition if the upstream firm subsidises the downstream firm’s production via negative wholesale input prices. However, the assumption of a negative input price is not economically viable as it encourages the downstream firms to buy an unbounded amount of inputs. We show that the welfare ranking is reversed once we introduce a non-negativity constraint on the input prices.
Bibliography:ObjectType-Article-1
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ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2017.01.021