Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, November 19, 2019

Market Power in Bilateral Oligopoly Markets With Non-expandable Infrastructures

Yukihiko Funaki, Waseda University, School of Political Science and Economics, Harold Houba, VU University Amsterdam, Department of Econometrics; VU University Amsterdam, Tinbergen Institute, and Evgenia Motchenkova, VU University Amsterdam - Department of Economics; TILEC describe Market Power in Bilateral Oligopoly Markets With Non-expandable Infrastructures.

ABSTRACT: We develop a novel model of price-fee competition in bilateral oligopoly markets with non-expandable infrastructures and costly transportation. The model captures a variety of real market situations and it is the continuous quantity version of the assignment game with indivisible goods on a fixed network. We define and characterize stable market outcomes. Buyers exclusively trade with the supplier with whom they achieve maximal bilateral joint welfare at prices equal to marginal costs. Maximal fees and the suppliers' market power are restricted by the buyers' credible threats to switch suppliers. Maximal fees also arise from a negotiation model that extends price competition to price-fee competition. Competition in both prices and fees necessarily emerges. It improves welfare compared to price competition, but buyers will not be better off. The minimal infrastructure achieving maximal aggregate welfare differs from the minimal network that protects buyers most.

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