Price and Quantity Competition under Vertical Pricing

Abstract

We consider a vertically related market where one quantity-setting and another price-setting downstream firm negotiate the terms of a two-part tariff contract with an upstream input supplier. In contrast to the traditional belief, we show that the price-setting firm produces a higher output and earns a higher profit than the quantity-setting firm when bargaining is decentralised. Additionally, both firms produce the same output, whereas the profit is higher under the price-setting firm than the quantity-setting firm when bargaining is centralised.