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Do firms choose overcapacity or undercapacity in a vertical structure?
Author(s) -
Choi Kangsik,
Lee DongJoon
Publication year - 2020
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3141
Subject(s) - cournot competition , monopolistic competition , microeconomics , downstream (manufacturing) , economics , tariff , competition (biology) , monopoly , industrial organization , distortion (music) , upstream (networking) , vertical integration , final good , bertrand competition , oligopoly , production (economics) , international economics , operations management , computer science , ecology , amplifier , computer network , bandwidth (computing) , biology
This study investigates capacity choice in a vertical structure in which each downstream firm makes its capacity decision, then a monopolistic upstream firm proposes the input price or two‐part tariff contract. Finally, each downstream firm chooses its output (or price). Contrary to the conventional wisdom that both firms hold excess capacity in an Cournot competition, we find that each downstream firm always chooses undercapacity regardless of both the nature of goods and the competition modes. Second, we also show that capacity efficiency is higher under Cournot competition than under Bertrand competition. Third, even though there are double marginalization distortion and rent‐extracting effect, we can achieve the monopoly equilibrium of the vertically integrated firm though two‐part tariff contract.