Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries

Abstract

Bargaining, Mergers, and Technology Choice in Bilaterally Oligopolistic Industries by Roman Inderst and Christian WeyThis paper provides a conceptual framework of multilateral bargaining in a bilaterally oligopolistic industry to analyze the motivations for horizontal mergers, technology choice, and their welfare implications. We first analyze the implication of market structure for the distribution of industry profits. We find that retailer mergers are more likely (less likely) if suppliers have increasing (decreasing) unit costs, while supplier mergers are more likely (less likely) if goods are substitutes (complements). In a second step we explore how market structure affects suppliers' technology choice, which reflects a trade-off between inframarginal and marginal production costs. We find that suppliers focus more on marginal cost reduction if (i) retailers are integrated and (ii) suppliers are non-integrated.In a final step we consider the whole picture where both market structure and (subsequent) technology choice are endogenous. Analyzing the equilibrium market structure, we find cases where retailers become integrated to induce suppliers to choose a more efficient technology, even though integration weakens their bargaining position. In this case the merger benefits all parties, i.e., suppliers, retailers, and even consumers. However, we also show that the equilibrium market structure does often not maximize welfare. Keywords

Group purchasing, nonlinear tariffs, and oligopoly

“…Some theoretical models also have the feature that innovation is suppressed by buyer power. In a model featuring bargaining between oligopolistic manufacturers and buyers, Inderst and Wey (2003) demonstrate that sellers' incentives to innovate can increase when buyers in the downstream market combine. They generalize their result in a subsequent paper (Inderst and Wey, 2005).…”

The Design of Vertical R&D Collaborations

“…We therefore include it as a variable in the initial R&D collaboration contract. This is akin to Schmitz and Sliwka (2001) and Inderst and Wey (2003) who also consider the choice of technology in vertical relationships. Schmitz and Sliwka (2001) focus on the joint determination of ownership and specificity against the background of a standard hold-up problem.…”

“…In Inderst and Wey (2003), technology -determining the supplier's cost structure -is also a fixed characteristic. The authors then consider the interaction between the choice of technology and (downstream) market structure and competition, rather than looking at organizational issues or collaborative investments.…”

Multiunion Bargaining: Tariff Plurality and Tariff Competition

“…By that we solve for a Nash equilibrium of two simultaneous bargaining problems (see Chipty and Snyder, 1999, for a formalization). Inderst and Wey (2003) assume contracts which condition on the fact whether or not the other bargaining is successful. They show that this protocol gives rise to the Shapley value (see also Stole and Zwiebel, 1996).…”