Vertical exclusion with downstream risk aversion or limited liability

An upstream firm with full commitment bilaterally contracts with two exante identical downstream firms. Each observes its own cost shock, and facesuncertainty from its competitor’s shock. When they are risk neutral and canabsorb losses, the upstream firm contracts symmetric outputs for productionefficiency. However, when they are risk averse, competition requires thepayment of a risk premium due to revenue uncertainty. Moreover, whenthey enjoy limited liability, competition requires the upstream firm to shareadditional surplus. To resolve these trade-offs, the upstream firm offersexclusive contracts in many cases