NONLINEAR PRICING IN VERTICALLY RELATED DUOPOLIES

A vertically separated duopolistic market is analyzed in which manufac turers compete in wholesale price schedules and retailers in quantity, Under certainty there exists a continuum of equilibria. The introduct ion of an uncertain demand parameter, observed only by retailers, dram atically reduces the set of equilibria. Quantity discounts emerge in m arkets with only moderately decreasing returns to scale in manufacturi ng (and quantity competition downstream), With additive shocks to dema nd, the equilibria coincide with those of markets in which vertically integrated firms compete in supply functions before market uncertainty is resolved. However, generically equilibria in my model are not supp ly function equilibria.