Centralized Bargaining With Pre-Donation in a Vertically Related Industry

Abstract

This paper studies the incentives for, and the welfare effects of, pre-donation in a vertically related industry where two downstream firms that produce a homogenous good jointly bargain, using the generalized Nash rule, with an upstream firm over a linear input price before they engage in Cournot competition. We theoretically show that the downstream industry has no incentive to make any pre-donation and this is irrespective of its bargaining power and also irrespective of whether it is a monopoly or a symmetric or asymmetric duopoly. Also, irrespective of the said structures of the downstream industry, we show computationally that (i) the upstream firm finds to make unilateral pre-donation optimal if and only if its bargaining power is sufficiently small and (ii) its optimal pre-donation (whenever positive) always yields Pareto welfare gains.