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Upstream Capacity Constraint and the Preservation of Monopoly Power in Private Bilateral Contracting
Author(s) -
Avenel Eric
Publication year - 2012
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/joie.12001
Subject(s) - monopoly , monopolistic competition , constraint (computer aided design) , microeconomics , upstream (networking) , economics , production (economics) , power (physics) , industrial organization , mathematical economics , mathematics , computer science , physics , geometry , quantum mechanics , computer network
This article presents a model of private vertical contracting with a capacity constrained monopolistic supplier. I consider ‘full capacity beliefs’ that are consistent with an upstream capacity constraint and are ‘wary’ when the constraint is tight or production is costless. I show that, facing a capacity constraint, the supplier may preserve its monopoly power in equilibrium. This result stands in sharp contrast to the standard result that the supplier cannot preserve its monopoly power, which holds under the usual implicit assumption of an infinite production capacity.