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Equilibrium strategic overbuying

Author

Listed:
  • Éric Avenel

    (University of Rennes 1 - CREM-CNRS, France)

  • Clémence Christin

    (Düsseldorf Institute for Competition Economics, Deutschland)

Abstract

We consider two firms competing both to sell their output and purchase their input from an upstream firm, to which they offer non-linear contracts. Firms may engage in strategic overbuying, purchasing more of the input when the supplier is capacity constrained than when it is not in order to exclude their competitor from the final market. Warehousing is a special case in which a downstream firm purchases more input than it uses and disposes of the rest. We show that both types of overbuying happen in equilibrium. The welfare analysis leads to ambiguous conclusions.

Suggested Citation

  • Éric Avenel & Clémence Christin, 2011. "Equilibrium strategic overbuying," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201205, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    • Handle: RePEc:tut:cremwp:201205
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    References listed on IDEAS

    as
    1. Oliver Hart & Jean Tirole, 1990. "Vertical Integration and Market Foreclosure," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990 Micr), pages 205-286.
    2. Clémence Christin, 2013. "Entry Deterrence Through Cooperative R&D Over-Investment," Recherches économiques de Louvain, De Boeck Université, vol. 79(2), pages 5-26.
    3. Eric Avenel, 2012. "Upstream Capacity Constraint and the Preservation of Monopoly Power in Private Bilateral Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 60(4), pages 578-598, December.
    4. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    5. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 345-356.
    6. Jean J. Gabszewicz & Skerdilajda Zanaj, 2008. "Upstream Market Foreclosure," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 13-26, January.
    7. Marie-Laure Allain & Saïd Souam, 2004. "Concentration horizontale et relations verticales," Working Papers hal-00242914, HAL.
    8. Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
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    Cited by:

    1. Zhou, Pin & Xu, He & Wang, Hongwei, 2020. "Value of by-product synergy: A supply chain perspective," European Journal of Operational Research, Elsevier, vol. 285(3), pages 941-954.
    2. Zhibin (Ben) Yang & Xinxin Hu & Haresh Gurnani & Huiqi Guan, 2018. "Multichannel Distribution Strategy: Selling to a Competing Buyer with Limited Supplier Capacity," Management Science, INFORMS, vol. 64(5), pages 2199-2218, May.

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    More about this item

    Keywords

    entry deterrence; overbuying; vertical contracting;
    All these keywords.

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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