Vertically Related Industries With a Monopoly Upstream Input Market and a Downstream Differentiated Production With Convex Costs

This note deals with the profitability effects of different upstream market structures (bilateral monopoly vs. monopoly) in a vertical industry with downstream price competition for differentiated goods and convex production technology. The main findings offer new implications for the vertical market theory: Fiercer competition in the product market may require a strong monopoly power in the input market to achieve both the highest final firms’ profitability and the highest total channel profit.