Vertical Integration in a Sequential Model of a Supply Chain with Bargaining

This article proposes a sequential model of a vertical supply chain and investigates the model’s predictions about vertical integration. The model accommodates both linear and non-linear pricing, which is important because the amount of double margin distortion drives predictions about vertical integration. The upstream is modeled as a negotiation over wholesale prices, and the downstream is differentiated product price-setting. Existing literature has focused on modeling the upstream and downstream markets as simultaneously determining prices. A sequential model can yield significantly different predictions about the effects of vertical integration and readily accommodates linear and non-linear pricing in the upstream negotiations.