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Vertical Exclusion with Downstream Risk Aversion or Limited Liability

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  • Stephen Hansen
  • Massimo Motta

Abstract

An upstream firm with full commitment bilaterally contracts with two ex ante identical downstream firms. Each observes its own cost shock, and faces uncertainty from its competitor’s shock. When they are risk neutral and can absorb losses, the upstream firm contracts symmetric outputs for production efficiency. However, when they are risk averse, competition requires the payment of a risk premium due to revenue uncertainty. Moreover, when they enjoy limited liability, competition requires the upstream firm to share additional surplus. To resolve these trade‐offs, the upstream firm offers exclusive contracts in many cases.

Suggested Citation

  • Stephen Hansen & Massimo Motta, 2019. "Vertical Exclusion with Downstream Risk Aversion or Limited Liability," Journal of Industrial Economics, Wiley Blackwell, vol. 67(3-4), pages 409-447, September.
    • Handle: RePEc:bla:jindec:v:67:y:2019:i:3-4:p:409-447
    DOI: 10.1111/joie.12212
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    Cited by:

    1. Pagnozzi, Marco & Piccolo, Salvatore & Reisinger, Markus, 2021. "Vertical contracting with endogenous market structure," Journal of Economic Theory, Elsevier, vol. 196(C).
    2. Angelika Endres-Fröhlich, 2022. "The Impact of Product Differentiation on the Channel Structure in a Manufacturer-Driven Supply Chain," Working Papers Dissertations 92, Paderborn University, Faculty of Business Administration and Economics.

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