Horizontal contracts in a dominant firm-competitive fringe model

Antelo, Manel and Bru, Lluís (2021): Horizontal contracts in a dominant firm-competitive fringe model.

Abstract

This paper offers a rationale for production subcontracting by a market power firm from smaller firms despite the latter’s ability to sell the good for themselves. Particularly, in a dominant firm (DF) model in which the good can be sold through linear pricing or through nonlinear two-part tariff (2PT) contracts, we demonstrate that the DF finds it optimal, whenever it sells its own production plus outsourced production, to subcontract production from fringe firms by setting nonlinear 2PT contracts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dominant firm model, linear prices, nonlinear 2PT contracts, horizontal subcontracting, welfare
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks

References

Allaz, B. and J.L.Vila (1993), Cournot competition, forward markets and efficiency, Journal of Economic Theory 59, 1-16.

Antelo, M. and L. Bru (2002), Forward contracts and competition, Spanish Economic Review 4, 281-300.

Antelo, M. and L. Bru (2020), Intrapersonal price discrimination and welfare in a dominant firm model, mimeo.

Armstrong, M. and J. Vickers (2001), Competitive price discrimination, RAND Journal of Economics, 579-605.

Armstrong, M. (2006), Recent developments in the economics of price discrimination, in R. Blundell, W.K. Newey and T. Persson (eds.), Advances in Economics and Econometrics: Theory and Applications. Ninth World Congress: vol. II. (pp. 97-141), Cambridge University Press: Cambridge.

Baake, P., J. Oechssler and C. Schenk (1999), Explaining cross-supplies, Journal of Economics 70, 37-60.

Bhaskar, V. and T. To (2004), Is perfect price discrimination really efficient? An analysis of free entry, Rand Journal of Economics 35, 762-776.

Bonacina, M. and F. Gulli (2007), Electricity pricing under ‘‘carbon emissions trading’’: A dominant firm, Energy Policy 35, 4200-4220.

Carlton, D.W. and J.M. Perloff (2000), Modern Industrial Organization, 3th ed.

Gowrisankaran, G. and T.J. Holmes (2004), Mergers and the evolution of industry concentration: Results from DF model, RAND Journal of Economics 35, 561-582.

IMAA (Institute for Mergers, Acquisitions and Alliances) (2017), M&A statistics database. (Retrieved from https://imaa-institute.org/mergers-and-acquisitions-statistics/) (Accessed 01.June.2017)

Kahai, S.K., D.L. Kaserman and J.W. Mayo (1996), Is the “Dominant Firm” Dominant? An Empirical Analysis of AT&T’S Market Power, Economics and Finance, Paper 5.

Mahenc, P. and F. Salanié (2004), Softening competition through forward trading, Journal of Economic Theory 116, 282-293.

Mrazova, M., and J.P. Neary (2016), Not So Demanding: Demand Structure and Firm Behavior. (Retrieved from http://users.ox.ac.uk/~econ0211/papers/pdf/SuperC.pdf)

Newbery, D.M.G. (1984), Manipulation of futures markets by a dominant producer. In Anderson, R. (ed.) The Industrial Organization of Futures Markets, Lexington Books, Lexington Mass.

Rassenti, S.J. and B.J. Wilson (2003), How applicable is the dominant firm model of price leadership? Mimeo, George Mason University.

Shepherd, W.G. (1997), The Economics of Industrial Organization: Analysis, Markets, Policies, Prentice-Hall.

Spiegel, Y. (1993). Horizontal subcontracting, RAND Journal of Economics, 570-590.

Stole, L.A. (2007), Price discrimination and competition, in M. Armstrong and R. Porter (eds.), Handbook of Industrial Organization, vol. 3, pp. 2221-2299.

Tirole, J. (1988), The Theory of Industrial Organization, MIT Press.

Wilson, B. and S.J. Rassenti (2004), How Applicable is the Dominant Firm Model of Price Leadership? Experimental Economics 7, 271-288.