Mutual Outsourcing between Downstream Firms on Endogenous Competition

Using decentralized Nash bargaining with two-part tariff under mutual outsourcing between symmetric downstream firms, we demonstrate endogenous choice of competition mode with each exclusive channel. Recent market structure captures that the mutual outsourcing has become a common business practice in technology intensive industries. We show that asymmetric competition appears as an equilibrium with the possibility of highest social welfare when the product differentiation is intermediate. Otherwise, Bertrand (Cournot) competition appears as an equilibrium and obtain Pareto efficiency without (with) prisoner's dilemma when the competition becomes soft (fierce). Thus, depending on the degree of product differentiation and endogenous competition mode, the rankings of social welfare, consumer and producer surpluses are determined