Downstream mode of competition with upstream market power

• Downstream mode of competition as a renegotiation-proof contract in vertical chains.
• Cournot downstream competition is always sustained under substitute goods.
• Bertrand downstream competition is always sustained under complementary goods.
• Results hold independently the distribution of bargaining power over input prices.

In a two-tier oligopoly, where the downstream firms are locked in pair-wise exclusive relationships with their upstream input suppliers, the equilibrium mode of competition in the downstream market is endogenously determined as a renegotiation-proof contract signed between each downstream firm and its exclusive upstream input supplier. We find that the upstream–downstream exclusive relationships credibly sustain the Cournot (Bertrand) mode of competition in the downstream market, when the goods are substitutes (complements). In contrast to previous studies, this result holds irrespectively of the degree of product differentiation and the distribution of bargaining power between the upstream and the downstream firm, over the pair-specific input price.