Vertical Opportunism, Bargaining, and Share-Based Agreements

In a two-tier industry where an upstream monopolist supplies an essential input to horizontally differentiated downstream firms, two-part tariffs (TPTs) and share-based agreements (SBAs) are two contractual agreements for addressing potential double-marginalization problems. In this paper, we show that SBAs are not equivalent to TPTs. This holds under both secret and interim observable contract terms, as well as under quantity and price downstream competition. SBAs lead to higher wholesale and retail prices, and lower aggregate output, consumer surplus, and social welfare. However, under exclusive dealing between multiple upstream suppliers and downstream firms, these two types of vertical contracts are equivalent.