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Vertical bargaining and countervailing power

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Abstract

We study the existence of countervailing buyer power in a vertical industry where the input price is set via Nash bargainings between one upstream supplier and many differentiated but competing retailers. In case one bilateral bargaining fails, the supplier still has the ability to sell to the other retailers. We show that the capacity of these other retailers to react in the final market has a dramatic impact on the supplier’s outside options and, ultimately, on input prices and welfare. Under downstream quantity competition, we find either no or opposite support to the hypothesis of countervailing power on input prices, as the retail industry becomes more concentrated. With price competition, we find a case for countervailing power, but its existence depends on the degree of product differentiation and on the ability of competing retailers to react to a disagreement.

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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 160.

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Length: 27 pages
Date of creation: 28 May 2010
Date of revision: 28 May 2010
Handle: RePEc:rtv:ceisrp:160

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Web page: http://www.ceistorvergata.it
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

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Keywords: Countervailing buyer power; Nash bargaining.;

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References

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  1. Milliou, Chrysovalantou & Petrakis, Emmanuel, 2007. "Upstream horizontal mergers, vertical contracts, and bargaining," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(5), pages 963-987, October.
  2. von Ungern-Sternberg, Thomas, 1996. "Countervailing power revisited," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(4), pages 507-519, June.
  3. Björnerstedt, Jonas & Stennek, Johan, 2001. "Bilateral Oligopoly," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2864, C.E.P.R. Discussion Papers.
  4. George Symeonidis, 2008. "Downstream Competition, Bargaining, and Welfare," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 17(1), pages 247-270, 03.
  5. Mónica Correa-López, 2007. "Price and Quantity Competition in a Differentiated Duopoly with Upstream Suppliers," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 16(2), pages 469-505, 06.
  6. Inderst, Roman & Wey, Christian, 2003. " Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 1-19, Spring.
  7. Dowrick, Steve, 1989. "Union-Oligopoly Bargaining," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1123-42, December.
  8. Häckner, Jonas, 1999. "A Note on Price and Quantity Competition in Differentiated Oligopolies," Research Papers in Economics, Stockholm University, Department of Economics 1999:9, Stockholm University, Department of Economics.
  9. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  10. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 643-85, April.
  11. Zhiqi Chen, 2001. "Dominant Retailers and the Countervailing Power Hypothesis," Carleton Economic Papers 01-05, Carleton University, Department of Economics, revised 2003.
  12. Roman Inderst & Tommaso Valletti, 2009. "Price discrimination in input markets," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 1-19.
  13. Naylor, Robin A., 2002. "Industry profits and competition under bilateral oligopoly," Economics Letters, Elsevier, Elsevier, vol. 77(2), pages 169-175, October.
  14. Lopez, Monica Correa & Naylor, Robin A., 2004. "The Cournot-Bertrand profit differential: A reversal result in a differentiated duopoly with wage bargaining," European Economic Review, Elsevier, Elsevier, vol. 48(3), pages 681-696, June.
  15. Horn, H. & Wolinsky, A., 1988. "Bilateral Monopolies And Incentives For Merger," Papers, Stockholm - International Economic Studies 410, Stockholm - International Economic Studies.
  16. Dobson, Paul W., 1994. "Multifirm unions and the incentive to adopt pattern bargaining in oligopoly," European Economic Review, Elsevier, Elsevier, vol. 38(1), pages 87-100, January.
  17. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 210-30, March.
  18. Esther Gal-Or & Anthony Dukes, 2006. "On the Profitability of Media Mergers," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 79(2), pages 489-526, March.
  19. Robert Marshall & Antonio Merlo, 1996. "Pattern bargaining," Staff Report, Federal Reserve Bank of Minneapolis 220, Federal Reserve Bank of Minneapolis.
  20. Dobson, Paul W. & Waterson, Michael, 2007. "The competition effects of industry-wide vertical price fixing in bilateral oligopoly," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 25(5), pages 935-962, October.
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Cited by:
  1. Haskel, Jonathan & Iozzi, Alberto & Valletti, Tommaso, 2013. "Market structure, countervailing power and price discrimination: The case of airports," Journal of Urban Economics, Elsevier, vol. 74(C), pages 12-26.

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