Price discount for the increased order as a cooperative game in bilateral monopoly

Abstract

The bilateral monopoly is the market structure that joins sole producer of the good and the monopolistic distributor of it. There are two possible solutions to the determination of price and quantity traded between buyer and seller. First, non-cooperative one, is the price leadership of the seller producing the Bowley equilibrium. Second is cooperative solution maximizing joint profits with undetermined price. The price level shares the sum of profits between buyer and seller. The article applies the Nash bargaining solution to determine the agreement point in two stage cooperation. The aim of the study is to investigate, what will be the cooperative solution if the buyer and seller achieve the Bowley equilibrium point first and then negotiate cooperative set of the price discount and the quantity traded growth rate. The outcome of the model is the asymmetric division of the maximized joint profit. Thanks to his price leadership, the share of the seller is significantly higher than for the one stage cooperation.