Buyer-Supplier Bargaining and Intra-Industry Competition

Abstract

This chapter considers the trading processes between a monopoly supplier and a downstream oligopolistic industry and examines how the degree of downstream rivalry affects both the size and the distribution of profits in the market. With the downstream oligopolists setting the output level and bargaining only over the transfer price, total market profits are primarily determined by the degree of coordination in the final market. If the oligopolists behave in a perfectly competitive manner, then all the available profits are competed away. However, it is shown that strong collusion in the final market can also (perversely) harm the oligopolists, as well as the supplier, by restricting output below the optimal vertical integration level. With price-and-quantity (efficient) bargaining this problem does not arise and the shares of the joint profit-maximizing surplus are distributed simply according to the degree of cooperation between the buyers in bargaining with the supplier.

I would like to thank Mike Waterson, Arjen van Witteloostuijn and participants at the EARIE 19th annual conference, Stuttgart-Hohenheim, for useful comments. Any remaining errors are my own.