Jos Jansen

"Coexistence of strategic vertical separation and integration"
JEL codes: L22, L42
Keywords: vertical oligopoly, contract costs, strategic substitutes

Abstract: This paper gives conditions under which vertical separation is chosen by some upstream firms, while vertical integration is chosen by others in the equilibirum of a symmetric model. A vertically separating firm trades off fixed contracting costs against the strategic benefit of writing a (two-part tariff, exclusive dealership) contract with its retailer. Equilibrium coexistence emerges when observable and non-renegotiable contracts are offered to downstream Cournot oligopolists that supply close substitutes. The scope for equilibrium coexistence diminishes when assumptions on contract observability and commitment are relaxed.

Pre-publication copy: text, figure.