Vertical contractual relations and bargaining: the role of the retailing cost.

Abstract

We study the role of the retailing cost in vertically related markets where the contract terms are determined through negotiations between an upstream supplier and two downstream retailers who compete in quantities in the downstream market. We examine both the cases of linear and non-linear pricing. In each case, we build two different models, concerning the ability of a retailer to react when its rival retailer and the supplier fail to reach an agreement. The ability of the retailer to react to a breakdown of the negotiations, affects, apart from the supplier's disagreement payoffs, the negotiated contract terms and the consumer prices. When the contracts take the form of two-part tariffs, the most efficient retailer is the one that can negotiate better contract terms. Moreover, when there is no reaction to the breakdown of the negotiations, when a retailer becomes more efficient in the production of the final good, it is able to negotiate more favourable contract terms, while the other retailer's terms of trade deteriorate.