Endogenous Competition Mode with Asymmetric Retailers

Abstract

With welfare implication, we analyze the endogenous choice of competition mode where asymmetric retailers for the cost involve in price discrimination and uniform pricing with an upstream input supplier under vertical contracts. In contrast to previous results, we find that under uniform pricing, if the cost difference between asymmetric retailers is sufficiently small, then choosing price contract is a dominant strategy for both retailers. On the other hand, if the cost difference is sufficiently large, choosing price contract for inefficient retailer and choosing quantity contract for efficient retailer are implemented in equilibrium under uniform pricing, while this equilibrium is sustained regardless of cost difference under price discrimination. Moreover, social welfare is always higher under uniform pricing than under price discrimination even though each equilibrium under uniform pricing facilitates implicit collusion in the endogenous choice of competition mode.