(In)efficient trading forms in competing vertical chains

We study competing vertical chains where upstream and downstream firms bargain over their form and terms of trading. Both (conditionally) inefficient wholesale price contracts and efficient contracts that take the form of price-quantity bundles (and not of two-tariffs) arise in equilibrium under different parameter configurations. Changes in bargaining power distribution affect market outcomes by altering the trading terms and, more importantly, the trading form. As a result, a firm might benefit by a reduction in its bargaining power and consumers could benefit from an increase in the downstream �countervailing power� or from a more uneven bargaining power distribution.Vertical chains; strategic contracting; bargaining; two-part tariffs; price-quantity bundles; wholesale prices; vertical integration