The ambiguous competitive effects of passive partial forward ownership

Abstract

In a two-tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward ownership (PPFO) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFO is pro-competitive and welfare-increasing. While under two-part tariffs, it is anti-competitive and welfare-decreasing. These hold irrespectively of the degree of product differentiation, the observability or not of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.