Input price, bargaining power, and a multi-input-multi-product firm

This paper investigates conditions under which the downstream firm can benefit from cost disadvantages arose from upstream sector. We consider a vertically related industry consisting of two upstream firms (a specific input supplier and a common input supplier) and one multi-product downstream firm. The downstream firm produces two vertically differentiated products and sells either in two separate markets or in one market. Findings identify a situation under the view that both downstream firms’ profits and consumer surplus are increasing with the input production cost or the bargaining power of upstream firms, which depends on whether the common input supplier has market power. Specifically, in the one market case, we shed light on the importance of the marginal product of the common input of the high-quality product for both the downstream firm’s profit and consumer surplus improving. Moreover, we check the robustness of our findings for extension by considering horizontal product differentiation, price competition, using the specific input for two products, and bilateral bargaining. Our main findings still hold.