Considering a vertical structure with perfectly competitive upstream firms that deliver a homogenous good to a differentiated retail duopoly, we show that upstream fixed costs may help to monopolize the downstream market. We find that downstream prices increase in upstream firms'fixed costs when both intra- and interbrand competition exist. Our findings contradict the common wisdom that fixed costs do not affect market outcomes.
Fixed Costs; Vertical Contracting; Monopolization;
- L13: Oligopoly and Other Imperfect Markets
- L14: Transactional Relationships • Contracts and Reputation • Networks
- L42: Vertical Restraints • Resale Price Maintenance • Quantity Discounts
TSE Working Paper, n. 14-524, July 2014