The Optimal Trading Partner for an Upstream Monopolist

Yamada, Mai (2016): The Optimal Trading Partner for an Upstream Monopolist.

Abstract

We examine an optimal trading partner for an upstream monopolist, an input supplier, in a situation in which the intensity of market competition depends on trading partner choice. The upstream monopolist supplies the input to either the incumbent or the entrant. We assume only incumbent has the outside option which it can make the input by itself and then produces the final product. On the other hand, the entrant does not have the outside option. If the upstream firm chooses the incumbent as its trading partner, it can have a bilateral monopoly relationship with the incumbent. If the upstream firm chooses the entrant as its trading partner, it faces downstream competition. We show trading with the entrant can yield greater profits for the upstream monopolist than trading with the incumbent. Thus, the upstream monopolist has incentives to encourage downstream competition through its trading partner choice. Our paper suggests that the existence of the incumbent's outside option encourages new entry into the downstream market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Upstream monopolist; Trading partner choice; Bargaining game; Profits; Outside Option
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C78 - Bargaining Theory ; Matching Theory; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets

References

Caprice, S., 2005. Incentive to encourage downstream competition under bilateral oligopoly. Economics Bulletin 12: 1-5.

Coughlan, A.T., Soberman, D.A., 2005. Strategic segmentation using outlet malls. International Journal of Research in Marketing 22: 61-86.

Chemla, G., 2003. Downstream competition, foreclosure, and vertical integration. Journal of Economics and Management Strategy 12: 261-289.

Inderst, R., Wey, C., 2003. Bargaining, mergers, and technology choice in bilateral oligopolistic industries. RAND Journal of Economics 34, 1-19.

Ishida, J., Matsushima, N., 2005. FDI may help rival firms. Economics Bulletin 22: 1-8.

Matsushima, N., 2006. Industry profits and free entry in input markets. Economics Letters 93: 329-336.

Matsushima, N., Mizuno, T., 2012. Profit-enhancing competitive pressure in vertically related industries. Journal of The Japanese and International Economics 26: 142-152.

Matsushima, N., Shinohara, R., 2014. What factors determine the number of trading partners? Journal of Economic Behavior $\&$ Organization 106: 428-441.

Milliou, C., Petrakis, E., 2007. Upstream horizontal mergers, vertical contracts, and bargaining. International Journal of Industrial Organization 25: 963-987.

Mukherjee, A., Zhao, L., 2009. Profit-raising entry. Journal of Industrial Economics 57: 870.

Mukherjee, A., Broll, U., Mukherjee, S., 2009. The welfare effects of entry: the role of the input market. Journal of Economics 98: 189–201.

Naylor, R., 2002. Industry profits and competition under bilateral oligopoly. Economics Letters 77: 169-175.

Sandonis, J., 2012. Upstream incentives to encourage downstream competition under bilateral oligopoly. Mimeo.

Tyagi, R., 1999. On the effects of downstream entry. Management Science 45: 59-73.

Wang, F.S., Lee, J., 2014. Profit-raising entry in vertically related markets. Managerial and Decision Economics.

Zhong, L., Lahiri, S., 2010. Profit share and partner choice in international joint ventures. Review of International Economics 18: 552–561.