Profit-Improving Linear Tariffs Pricing in a Vertical Oligopoly

Abstract

Considering the interplay between intra-firms (own retailing firms) and inter-firms (rival retailing firms) competition in vertically related markets, we compare linear tariffs and two-part tariffs pricing. In contrast to previous results, we show that when both products are sufficiently close substitutes, there is a threshold level of the number of retailing firms, beyond which each manufacturing firm ’ s profits are larger under linear tariffs pricing than under two-part tariffs pricing. It shows the contradictions to the conventional wisdom that two-part tariffs pricing is always better than linear tariffs pricing from the viewpoint of manufacturing firms. We also show that the wholesale prices increase as the number of retailing firms increases under two-part tariffs pricing, regardless of the degree of product substitutability.