Tuesday, October 18, 2016

The Nash bargaining solution in vertical relations with linear input prices

Aghadadashli, Hamid ; Dertwinkel-Kalt, Markus ; Wey, Christian examine The Nash bargaining solution in vertical relations with linear input prices.

ABSTRACT: We re-examine the Nash bargaining solution when an upstream and a downstream firm bargain over a linear input price. We show that the profit sharing rule is given by a simple and instructive formula which depends on the parties' disagreement payoffs, the profit weights in the Nash-product and the elasticity of derived demand. A downstream firm's profit share increases in the equilibrium derived demand elasticity which in turn depends on the final goods' demand elasticity. Our simple formula generalizes to bargaining with N downstream firms when bilateral contracts are unobservable.

https://lawprofessors.typepad.com/antitrustprof_blog/2016/10/the-nash-bargaining-solution-in-vertical-relations-with-linear-input-prices.html

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