American Economic Journal: Microeconomics: Vol. 6 No. 3 (August 2014)

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Vertical Bargaining and Countervailing Power

Article Citation

Iozzi, Alberto, and Tommaso Valletti. 2014. "Vertical Bargaining and Countervailing Power." American Economic Journal: Microeconomics, 6(3): 106-35.

DOI: 10.1257/mic.6.3.106

Abstract

We study a set of bilateral Nash bargaining problems between an upstream input supplier and several differentiated but competing retailers. If one bilateral bargain fails, the supplier can sell to the other retailers. We show that, in a disagreement, the other retailers' behavior has a dramatic impact on the supplier's outside options and, therefore, on input prices and welfare. We revisit the countervailing buyer power hypothesis and obtain results in stark contrast with previous findings, depending on the type of outside option. Our results apply, more generally, to the literature that incorporates negotiated input prices using bilateral Nash bargaining.

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Authors

Iozzi, Alberto (U Rome "Tor Vergata" and U London)
Valletti, Tommaso (U Rome "Tor Vergata" and Imperial College London)

JEL Classifications

C72: Noncooperative Games
C78: Bargaining Theory; Matching Theory
D43: Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
L13: Oligopoly and Other Imperfect Markets
L14: Transactional Relationships; Contracts and Reputation; Networks
L81: Retail and Wholesale Trade; e-Commerce

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