Supply contracts under partial forward ownership

Abstract

With forward ownership, an upstream supplier internalizes the effect of its supply contracts on the downstream firms, which is so far understood to decrease prices. We show that, instead, downstream prices generally increase if firms use two-part tariffs. The price-increasing effect of forward ownership occurs with both observable and secret two-part tariffs, albeit for different economic reasons. The results arise under both quantity and price competition as well as for different belief refinements. Partial forward ownership can be more profitable and more harmful for consumers than a full vertical merger between an upstream and a downstream firm.