Centralized bargaining with pre‐donation in a vertically related industry

Abstract

AbstractThis paper studies the incentives for, and the welfare effects of, pre‐donation in a vertically related industry where two downstream firms that produce a homogenous good jointly bargain, using the generalized Nash rule, with an upstream firm over a linear input price before they engage in Cournot competition. We theoretically show that the downstream industry has no incentive to make any pre‐donation and this is irrespective of its bargaining power and also irrespective of whether it is a monopoly or a symmetric or asymmetric duopoly. Also, irrespective of the said structures of the downstream industry, we show computationally that (i) the upstream firm finds to make unilateral pre‐donation optimal if and only if its bargaining power is sufficiently small and (ii) its optimal pre‐donation (whenever positive) always yields Pareto welfare gains.