Downstream Competition, Bargaining, and Welfare

Abstract

I analyze the effects of downstream competition when there is bargaining between downstream firms and upstream agents (firms or unions). When bargaining is over a uniform input price, a decrease in the intensity of competition (or a merger) between downstream firms may raise consumer surplus and overall welfare. When bargaining is over a two-part tariff, a decrease in the intensity of competition reduces downstream profits and upstream utility and raises consumer surplus and overall welfare. Standard welfare results of oligopoly theory can be reversed: less competition can be unprofitable for firms and/or beneficial for consumers and society as a whole.

Vertical Bargaining and Countervailing Power

“…7 See the discussion in Inderst and Valletti (2009), where it is argued that linear prices should be employed when preferential terms enhance a buyer's competitive position in the downstream markets, which would not be case with two-part tariffs that would lead to an adjustment only in the fixed part of the tariff. 8 Bargaining over observable nonlinear input prices is studied, among others, by O'Brien and Shaffer (2005), Antelo and Bru (2006), Milliou and Petrakis (2007), and Symeonidis (2008 and2010). The opportunism problem is reintroduced when the supplier negotiates separately with a "non-orchestrated" number of retailers, when these bilateral negotiations result in binding contracts (i.e., they cannot be withdrawn later after other outcomes have been observed).…”

“…The modeling of the outside option is of course not an issue in all those cases where the bargaining parties are assumed to be locked into a single bilateral relationship: if a negotiation breaks down, the two parties have no alternative and the outside option is zero (see, for instance, Correa-López and Naylor, 2004;Symeonidis, 2008 and2010;Naylor, 2002;Correa-López, 2007). In the case of input suppliers, this assumption is not very palatable: when a negotiation between a supplier and a retailer breaks down, the former may still obtain positive profits by selling the input to other retailers.…”

Upstream and downstream horizontal R&D networks

“…Taken together, propositions 1, 3 and 4 imply that, in the pursuit of their private interests, the downstream …rms and their upstream suppliers cannot collectively achieve a pro…t-maximizing outcome but, under certain conditions, may achieve a welfare- As a caveat to our conclusions above, we note that an important assumption of the model is that upstream and downstream …rms are locked into exclusive relations. This assumption can be justi…ed by assuming that, prior to their network formation decisions, the two parties have undertaken relationship-speci…c investments (see Symeonidis, 2008). Such investments, which would prevent the two parties from breaking up, are a common feature of the Japanese automobile industry, where automakers often engage in high-commitment relationships with their suppliers.…”

(Local) Wage Settings and (International) Entry Deterrence

“…Authors such as Davidson (1988), Horn and Wolinsky (1988a,b), Dowrick (1989), Bárcena-Ruiz and Garzón (2002), Petrakis andVlassis (2000, 2004), Lommerud, Straume, and Sørgard (2005), Kraft (2006), Mukherjee (2010), Symeonidis (2008Symeonidis ( , 2010, Mukherjee and Pennings (2011) and Fanti and Gori (2013) have examined the outcomes of different wage bargaining structures in oligopolies. De Fraja (1993), Dobson (1994) and Banerji (2002) further extend the analysis of sequential wage bargaining in unionized oligopolies.…”