TITLE:
Welfare Comparisons with a Consumer-Friendly Upstream Firm: Centralized vs. Decentralized Bargaining
AUTHORS:
Xu Zhang, Xingtang Wang
KEYWORDS:
Consumer-Friendly, Decentralized Bargaining, Centralized Bargaining, Consumer Surplus, Social Welfare
JOURNAL NAME:
Open Journal of Social Sciences,
Vol.5 No.3,
March
23,
2017
ABSTRACT: We investigate the endogenous choice of price (Bertrand) and quantity (Cournot) contract and the resulting social welfare in a vertically related up-stream-downstream market with a consumer-friendly upstream firm. We find that choosing price (quantity) contract is the dominant strategy for downstream firms when the two-part-tariff pricing contract is determined through centralized (decentralized) Nash bargaining. Moreover, if the consumer-friendly up-stream firm’s valuation over consumer surplus is sufficiently high and the product differentiation degree is sufficiently low, centralized bargaining is welfare-superior to decentralized bargaining. On the other hand, if the consumer-friendly upstream firm’s valuation over consumer surplus is sufficiently low and the product differentiation degree is sufficiently high, decentralized bargaining is welfare-superior to centralized bargaining. We also show that decentralized bargaining generates higher consumer surplus as compared to centralized bargaining, irrespective of both the product differentiation degree and the upstream firm’s valuation over consumer surplus.