Bowley Duopoly Under Vertical Relations

Abstract

Compared to the well‐known oligopoly models such as those of Cournot, the so‐called Bowley duopoly is less known, and almost ignored in the literature. This neglect reflects the assumption that as a leader–leader model incorporating apparent excess rivalry it is presumably untenable, at least in theory. However, it is, in fact, observable in practice. Furthermore, the predicted excess competition is not only observable empirically but also accountable theoretically. We show how excess competition emerges when an upstream monopolist offers the downstream retailers a compensated game in which each acts as a leader. The outcome is not only stable but also benefits all involved actors, including consumers under vertically‐related markets, such as those presided over by a monopolist producer. This result of emergent stability shows that the Bowley duopoly should be considered alongside other oligopoly models.