Input Quantity Commitment in Vertically Related Industries.

This study examines how a downstream firm determines the input quantity supplied from two upstream firms with asymmetric marginal costs. We find that the upstream firm with low marginal cost maximizes its profit by low input price and high input quantity, while the upstream firm with high marginal cost maximizes profit by high price and low quantity, when there is the low additional cost to order input from the cost-superior upstream firm. On the other hand, the downstream firm maintains the proportion of input quantity from the cost-superior firm at a positive level, even if there is high additional cost, because it can reduce the input price from the cost-inferior firm.