Market Power in Bilateral Oligopoly Markets with Nonexpendable Infrastructure

Posted by D. Daniel Sokol

Yukihiko Funaki (Waseda), Harold Houba (Vrije), and Evgenia Motchenkova (Vrije) analyze Market Power in Bilateral Oligopoly Markets with Nonexpendable Infrastructure.

ABSTRACT: We consider price-fee competition in bilateral oligopolies with perfectly-divisible goods, non-expandable infrastructures, concentrated agents on both sides, and constant marginal costs. We define and characterize stable market outcomes. Buyers exclusively trade with the supplier with whom they achieve maximal bilateral joint welfare. Prices equal marginal costs. Threats to switch suppliers set maximal fees. These also arise from a negotiation model that extends price competition. Competition in both prices and fees necessarily emerges. It improves welfare compared to price competition, but consumer surpluses do not increase. The minimal infrastructure achieving maximal aggregate welfare differs from the one that protects buyers most.