Oligopoly Intermediation, Relative Rivalry, and the Mode of Competition

Policy design in oligopolistic settings depends critically on the mode of competition between firms. We develop a model of oligopoly intermediation that reveals the mode of competition to be an equilibrium outcome that depends on the relative degree of rivalry between firms in the upstream and downstream markets. We examine two forms of sequential pricing games: Purchasing to stock (PTS), in which firms select input prices prior to setting consumer prices; and purchasing to order (PTO), in which firms sell forward contracts to consumers prior to selecting input prices. The equilibrium outcomes of the model range between Bertrand and Cournot depending on the relative degree of rivarly between firms in the upstream and downstream markets. Prices are strategic complements and the equilibrium prices coincide with the Bertrand outcome when the markets are equally rivalrous, while prices are strategic substitutes when the degree of rivalry is sufficiently high in one market relative to the other. Cournot outcomes emerge under circumstances in which prices are strategically independent in either the upstream or downstream market. We derive testable implications for the mode of competition that depend only on primitive conditions of supply and demand functions.