The Discrete Charm of Uniform Linear Pricing of an Input Production Joint Venture

A popular way of obtaining essential inputs is based on the establishment of an input production joint venture (IPJV) in the upstream (U) section of the vertical chain of production by firms competing and selling final goods downstream (D). Different governances may be designed for the management of an IPJV according to the ownership structure, the degree of delegation granted to the IPJV by parent firms and the extent of competition in the D market. Industry optimal arrangements with nonlinear pricing may be hard to implement and may be banned by regulators, mainly in the case of minimal delegation based on coordination (collusion) among the D firms. A handy and endurable governance turns out to be maximal delegation, i.e., an independent IPJV, seasoned with linear uniform pricing, even if this solution may contain some inefficiency.