Monday, November 30, 2020

Vertical Contracts and Entry

Vertical Contracts and Entry

Chrysovalantou Milliou

Athens University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Emmanuel Petrakis

University of Crete - Department of Economics


We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two-part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.

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