Essays On Microeconomics

Official URL: https://risc01.sabanciuniv.edu/record=b3422599

In vertically related markets with downstream competition, an upstream firm sells inputs to competing downstream firms, and prices are determined through bilateral bargaining. Horn and Wolinsky (1988) propose a simultaneous bargaining model for input price determination. However, whether or not no information disclosure (hence, simultaneous bargaining) is in the best interest of the upstream firm needs to be analyzed. We demonstrate that when the downstream duopoly competes à la Cournot, the upstream firm achieves more profit with full information disclosure by adopting sequential bilateral bargaining. We argue that the upstream firm is entitled to choose the rules of conduct concerning negotiations as it is the single input supplier and has the ability to employ non-disclosure clauses in its agreements. Therefore, it is plausible to expect the upstream firm to disclose information by employing sequential bargaining rather than simultaneous bargaining. We also analyze the outcome when there is a price regulation in the market calling for the adoption of a single price for the input.