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Bidding for input in oligopoly

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Abstract

We present a model where firms producing substitutes bid for inputs (especially labor) in a decentralized market. We show that downstream market power increases the intensity of competition for input through a new channel: local competitive foreclosure. In our model each unit of input (worker) is sold in a separate local market and firms try not just to get it, but also to keep it from their rivals. This externality leads to firms targeting the same units of input and the price of these is bid up. This effect mitigates the output reducing effect of downstream market power and in the limit (linear Cournot with constant returns) can even restore efficiency. As a result of coordination, there exist further equilibria, with prices above cost even with price taking suppliers in the labor application this leads to involuntary unemployment. When, instead of targeting, firms post prices, coordination no longer plays a role and we have a unique equilibrium that clears the market, still internalizing the externality. Finally, we show that targeting can also result in endogenous market segmentation and price\wage differentials.

Suggested Citation

  • Roberto Burguet & Jozsef Sakovics, 2016. "Bidding for input in oligopoly," ESE Discussion Papers 266, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:266
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    References listed on IDEAS

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    Cited by:

    1. Roberto Burguet & József Sákovics, 2016. "Bidding for Talent in Sport," Working Papers 902, Barcelona Graduate School of Economics.
    2. Roberto Burguet & Jozsef Sakovics, 2016. "To the highest bidder: The market for talent in sports leagues," ESE Discussion Papers 275, Edinburgh School of Economics, University of Edinburgh.
    3. Roberto Burguet & József Sákovics, 2016. "Bidding for Talent in Sport," Working Papers 902, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    competitive foreclosure; efficiency wage; involuntary unemployment; all-win auction;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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