Strategic spin-offs of input divisions

When a downstream producer enters backward into the input market, a “helping the rivals effect” exists: Such entry hurts the firm's downstream business as it increases upstream competition and thus benefits its rival downstream firms. This negative externality prevents the newly-created upstream unit from expanding. A spin-off enables the firm to credibly expand in the input market, thereby forcing its upstream competitors to behave less aggressively. Spin-offs occur in equilibrium if and only if the number of downstream firms exceeds a threshold level. When there is more than one integrated firm, a spin-off by a firm can trigger spin-offs by others that would not occur otherwise.     

Forward contracts and competition

This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a “horizontal” incentive to sell forward contracts in order to gain market share, but the former “vertical” incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market. We are indebted to Ramon Faulí-Oller, José Manuel Ordó?ez and Juan Carlos Reboredo for their helpful comments and suggestions on an earlier draft. We also gratefully acknowledge the valuable observations made by two anonymous referees and a Co-Editor that led to substantial improvements. Of course, the usual disclaimer applies. Antelo acknowledges financial support from the Xunta de Galicia (Grant PGIDIT02PXIA20101PR) and Bru that from the Spanish Ministerio de Ciencia y Tecnología (Grant PB98-1402).     

Bargaining power and firm profits in asymmetric duopoly: an inverted-U relationship

This paper investigates the effects of bargaining power on downstream firms’ profits. Consider a vertically related industry consisting of one upstream and two downstream firms, the latter having different marginal costs. Each pair bargains over a linear wholesale price, and then the downstream firms engage in Cournot competition. We show that the inefficient downstream firm may benefit from an increase in the bargaining power of the upstream firm. Furthermore, we obtain similar results when each downstream firm trades with its exclusive upstream agent, under non-linear demand function, or when downstream firms compete in price.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

Wage-vacancy contracts and coordination frictions

We consider a directed search model with risk-averse workers and risk-neutral entrepreneurs who can set up firms that post wage-vacancy contracts, i.e., contracts where firms can make payments to more than one applicant, and where the payments can be different for each applicant and be contingent on the number of applicants. We establish that the type of contracts the literature focuses on are not offered if firms can post wage-vacancy contracts. We show that there exists an equilibrium satisfying a Monotonic Expected Utility property which is efficient. Furthermore, we investigate the role of wage-vacancy contracts on welfare and competition.     

Credible delegation

We show that the vertical delegation of decision-making authority to agent firms can act as a credible strategic commitment even when contracts are unobservable (or renegotiable) if and only if multilateral delegation is combined with decentralized ownership of the agent firms. In this case, the possibility of renegotiation of other agents’ contracts constrains the set of contracts acceptable to each agent. Delegation may induce more or less aggressive behavior, depending on the nature of within-structure competition among the agent firms. Thus, delegation may be a valuable, credible strategic commitment mechanism when strategies are either substitutes or complements.     

Downstream mode of competition with upstream market power

In a two-tier oligopoly, where the downstream firms are locked in pair-wise exclusive relationships with their upstream input suppliers, the equilibrium mode of competition in the downstream market is endogenously determined as a renegotiation-proof contract signed between each downstream firm and its exclusive upstream input supplier. We find that the upstream–downstream exclusive relationships credibly sustain the Cournot (Bertrand) mode of competition in the downstream market, when the goods are substitutes (complements). In contrast to previous studies, this result holds irrespectively of the degree of product differentiation and the distribution of bargaining power between the upstream and the downstream firm, over the pair-specific input price.     

Mixed Competition and Patent Licensing

This paper studies the patent licensing decision of an insider patentee when two firms engage in a mixed (Cournot–Bertrand or Bertrand–Cournot) competition where one firm adopts the quantity strategy while the other uses the price strategy and vice versa. If either the fixed fee or royalty is applied, then the licensor prefers the fixed fee when the licensor takes the quantity strategy, while the licensee uses the price strategy (Cournot–Bertrand). If the two‐part tariff is applied, then the two‐part tariff is more likely to be adopted by the licensor under Cournot–Bertrand than under Bertrand–Cournot competition.     

Quality distortions in vertical relations

This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms’ perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms’ outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.     

FEE VERSUS ROYALTY POLICY IN LICENSING THROUGH BARGAINING: AN APPLICATION OF THE NASH BARGAINING SOLUTION

In this paper, we consider a Cournot duopoly market in which the patent‐holding firm negotiates with its rival firm about payments for licensing a cost‐reducing innovation. Applying the Nash bargaining solution, we compare two licensing policies, a fixed fee and a royalty. Our results are as follows. Royalty licensing is better than fixed fee licensing for both firms if the innovation is not drastic. So, royalty licensing is always carried out. Moreover, though there exists a case in which consumers prefer fixed fee licensing, royalty licensing is always superior to fixed fee licensing from the social point of view.     

‘To sell or not to sell’: Licensing versus selling by an outside innovator

We study various modes of technology transfer of an outside innovator in a spatial framework when the potential licensees are asymmetric. In addition to different licensing options, we also look into the option of selling the property rights of innovation and find the optimal mode of technology transfer. For licensing we find the optimal policy is to offer pure royalty contracts to both licensee firms when cost differentials between the firms are relatively small compared to the transportation cost, otherwise offer a fixed fee licensing contract to the efficient firm only. Interestingly, we show the innovator is always better-off selling the innovation to any one of the firms who further licenses it to the rival firm. The result holds irrespective of the size of the innovation (drastic or non-drastic) and the degree of cost asymmetry between the licensees. Social welfare is greater under selling than licensing.     

Quality differentiation and product innovation licensing

Evidence reveals that there are more than 50% product innovation licensings applied within industries. We study product innovation licensing (quality-enhancing licensing) in both exclusive and non-exclusive schemes each under unit/revenue royalty and fixed fee in a vertically differentiated Cournot oligopoly, where a quality-leading firm is an internal licensor. We show that, under a non-exclusive licensing, royalty licensing is the superior policy for the licensor if quality difference within firms is small, regardless of whether a unit or revenue royalty scheme is offered. Under an exclusive licensing, a two-part tariff is optimal. If fixed fee licensing is practicable, the licensor favors an exclusive licensing. Furthermore, an increase in quality difference within firms increases the optimal rates. Using the simulated results, we examine that licensing improves social welfare in all schemes, and the number of licensees will influence the magnitude of welfare enhancement.     

Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity–intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.     

Welfare reducing licensing

In this paper, we characterize situations where licensing a cost reducing innovation to a rival firm using two-part tariff contracts (a fixed fee plus a linear per unit of output royalty) reduces social welfare. We show that it occurs if (i) the firms compete in prices, (ii) the innovation is large enough but not drastic, and (iii) the goods are close enough substitutes. Moreover, we show that, regardless of the type of competition, first, the optimal contract always includes a positive royalty and, second, even drastic innovations are licensed whenever the goods are not homogeneous.     

WHY DO LARGE FIRMS TEND TO INTEGRATE VERTICALLY?

We provide a theoretical framework to discuss the relation between firm size and vertical structures. The framework is based on a Hotelling model with three downstream and three upstream firms. We show that vertical integration enhances the degree of product differentiation and show the strategic complementarity of product positioning. We also show that the downstream firm that has the largest market share is more likely to integrate vertically. Enhancing the degree of product differentiation is more beneficial for the large firm than for the rest of the downstream firms because the large firm supplies a large amount of product.     

Joint ownership and interconnection pricing in network industries

This paper investigates a vertical market structure called joint ownership, where a monopolistic upstream firm is jointly owned and operated by competing downstream firms. As such, a common interconnection price to an upstream bottleneck is determined by bargaining among the downstream firms. We show that (1) joint ownership can be superior to the other ownership structures by overcoming vertical externality of double marginalization; (2) collusive outcomes, however, may arise surrounding the setting of common interconnection price; (3) an overall performance of joint ownership depends crucially upon how equity shares are initially distributed and which bargaining rules are employed; and finally (4) a policy measure to promote downstream competition may have ambiguous consequences under joint ownership. Some managerial and political implications in implementing joint ownership in practice are also provided.     

Exclusion via Non‐Exclusive Contracts

We establish that non‐linear vertical contracts can allow an incumbent to exclude an upstream rival in a setting that does not rely on the exclusivity of the incumbent's contracts with downstream firms or any limits on distribution channels available to the incumbent or rival. The optimal contract we describe is a three‐part quantity discounting contract that involves the payment of an allowance to a downstream distributor and a marginal wholesale price below the incumbent's marginal cost for sufficiently large quantities. The optimal contract is robust to allowing parties to renegotiate contracts in case of entry.     

Firm Heterogeneity,Contract Enforcement,and the Industry Dynamics of Offshoring*

We develop an endogenous growth model with R&D spillovers to study the long‐run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm's production chain between a home upstream division and a foreign downstream division. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U‐shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.     

The Cournot-Bertrand profit differential: A reversal result in a differentiated duopoly with wage bargaining

This paper compares Cournot and Bertrand equilibria in a downstream differentiated duopoly in which the input price (wage) paid by each downstream firm is the outcome of a strategic bargain with its upstream supplier (labor union). We show that the standard result that Cournot equilibrium profits exceed those under Bertrand competition - when the differentiated duopoly game is played in imperfect substitutes - is reversible. Whether equilibrium profits are higher under Cournot or Bertrand competition is shown to depend upon the nature of the upstream agents’ preferences and on the distribution of bargaining power over the input price. We find that the standard result holds unless unions are both powerful and place considerable weight on the wage argument in their utility function.     

Bargaining, Bonding, and Partial Ownership

This article provides a theory of interfirm partial ownership. We consider a setting in which an upstream firm can make two alternative types of investment: either specific investment that only a particular downstream firm can use or general investment that any downstream firm is capable of using. When the benefits from specific and general investments are both stochastic, equity participation by the downstream firm in the upstream firm can lead to more efficient outcomes than take-or-pay contracts. The optimal ownership stake of the downstream firm is less than 50 percent under a natural assumption about relative bargaining power.