Quantity versus price competition in a vertically related market with sequential contracts

The study aims to re-examine the results of quantity and price competition. I consider a vertically related market where one upstream firm sequentially contracts with two downstream firms. I find that consumer surplus and social welfare under quantity competition can be higher than those under price competition. Under price competition with sequential contracting, an upstream firm offers a high wholesale price to a downstream firm contracted later, to help a downstream firm contracted earlier. The downstream firm contracted earlier anticipates this and sets a high retail price. Because prices are strategic complements, the downstream firm contracted later also sets a high retail price. Hence, competition in the downstream sector is softer under price competition, and the rankings of consumer surplus and social welfare can be reversed.