Multilateral Bargaining and Downstream Competition

We examine multilateral bargaining in vertical supply relationships which involve an upstream manufacturer who sells through two competing retailers to end consumers. In these relationships the negotiations are inter-dependent and a bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. The manufacturer may negotiate simultaneously with the retailers or sequentially with one retailer at a time. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. This observability of the existence of a prior agreement in the case of sequential negotiations can endogenously affect the bargaining externality. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, while sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price, and exclusively supply only the retailer who charged a relatively high retail price and maintain high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.