Returns to Scale and Vertical Restraints in a Regulated Industry.

This paper revisits, in an environmental context, the vertical restraints literature as developed by Bonanno and Vickers (1988), Gal-Or (1991), Lin (1988) or Nakache and Soubeyran (1998) in an oligopolistic and deterministic situation. This literature considers constant returns to scale at the upstream stage in an unregulated industry (absence of pollution standards) and proves, in this case, the domination (in terms of profits) of a Retail Price Maintenance contract by a Franchise fee contract for each firm. Here, we take account the presence of general returns to scale as well as finite pollution standards (regulation) and show that, contrary to the previous literature, there are several cases where Bertrand duopolistic firms are indifferent between Franchise Fee and Retail Price Maintenance in terms of profits. For the others cases, each firm finds it more interesting to select Franchise fee as usually.