Observable Versus Unobservable Contracts in Duopolistic Competition

One upstream and two downstream firms are involved in a vertically related industry. Under observable contracts, aware of both their own rival's input prices. However, under an unobservable contract, only know price unaware rival’s price. We demonstrate vertical separation integration the contracts. focus on methods: linear tariffs two-part tariffs. With asymmetric costs contracts increases consumer surplus social welfare. costs, (social welfare) is lower (higher) than tariffs, does not affect (decreases) welfare (under contracts). ones.