Multilateral Market Power in Input-Output Networks

Abstract

This paper models firm-to-firm trade in a production network as a set of double auctions. Firms have multilateral market power, namely, can affect prices in both input and output markets. The size and division of surplus are endogenous and depend only on technology, network position, and consumer preferences. The standard simplifying assumption of price-taking on input markets (unilateral market power) has systematic effects: it underestimates the final price and overestimates the surplus going upstream. These phenomena affect the model predictions for the welfare impact of mergers.

Figures (4)

• Figure 1: A simple vertical economy.
• Figure 2: Graphical representation of the choice of schedule by firm $U$. On the left (a): the best reply for firm $U$ to the residual demand given by the blue line. On the right (b): the optimal choice of firm $U$ leads other firms to adjust, modifying firm $U$ residual demand and optimal price: so firm $U$ further adjusts its best reply.
• Figure 3: A supply chain with 2 layers and 1 consumer good: $\mathcal{C}=\{1\}$.
• Figure 4: Left: pre-merger economy. The blue circle indicated the merging firms 2 and $1a$. Right: the economy after the merger: $1b$ and $1c$ are driven out of the market because the merged firm does not sell them the necessary input anymore, and the merged firm becomes a monopolist.

Theorems & Definitions (47)

• Definition 2.1
• Example 1
• Example 2
• Example 3: Supply chain with layers
• Lemma 3.1
• Definition 3.1
• Lemma 3.2
• Lemma 3.3
• Theorem 1
• Theorem 2