Multilateral Market Power in Input-Output Networks

TL;DR

This paper develops a model of firm-to-firm trade in production networks accounting for multilateral market power, showing how it influences prices, surplus division, and the welfare effects of mergers.

Contribution

It introduces a framework capturing multilateral market power in input-output networks, extending beyond traditional price-taking assumptions.

Findings

Multilateral market power affects final prices and upstream surplus.

Price-taking assumptions underestimate final prices and overestimate upstream surplus.

Implications for welfare analysis of mergers are significant.

Abstract

This paper models firm-to-firm trade in a production network as a set of double auctions. Firms have multilateral market power, namely, can affect prices in both input and output markets. The size and division of surplus are endogenous and depend only on technology, network position, and consumer preferences. The standard simplifying assumption of price-taking on input markets (unilateral market power) has systematic effects: it underestimates the final price and overestimates the surplus going upstream. These phenomena affect the model predictions for the welfare impact of mergers.