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Reverse First-mover and Second-mover Advantage in a Vertical Structure

Lee, DongJoon and Choi, Kangsik and Hwang, Kyu-Chan (2014): Reverse First-mover and Second-mover Advantage in a Vertical Structure.

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Abstract

This paper examines the issue of the first-mover and second-mover advantage in a vertical structure in which each manufacturer trades with a separated retailer via two-part tariffs. Compared to the canonical result in one-tier market, we find that the manufacturers' preference orderings over sequential versus simultaneous play are reversed in a vertical structure. We show that the Stackelberg leader (Stackelberg follower) had the first (second)-mover advantage in the downstream Cournot (Bertrand) competition. The first (second)-mover advantage compels its manufacturer to set the wholesale price higher than that of rival. Finally, we show that the manufacturer in which its retailer moves second (first) in a downstream Stackelberg Cournot (Bertrand) competition earns higher profits than the other in which its retailer moves first (second) in a downstream Stackelberg Cournot (Bertrand) competition.

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