Abstract
In a vertically related duopoly with input price bargaining, this paper re-examines the downstream firms’ profitability under different market competition degrees. It is shown the rather counterintuitive result that downstream firms earn highest profits with semi-collusion, whose level depends on the upstream bargaining structures, the relative parties’ bargaining power, and the parameters measuring the degree of product differentiation in the downstream market. Concerning social welfare, the key result is that policymakers can tolerate some degree of collusion with decentralized bargaining structures; centralized structures advise for a more procompetitive policy.
Highlights
Firms’ profitability in vertically related markets is a core topic in industrial economics and organization, and its relevance relies on the fact that input suppliers have relations based on negotiated price contracts with the producers of the final goods for consumers
The present paper focuses on the effects of different upstream coordination levels in negotiations on downstream firms profitability, stressing the relevance of different levels of downstream market competition/cooperation, measured both by a conjectural variation model, by the conjectural derivative (CD) parameter and the degree of differentiation among goods
Irrespective of the bargaining structure, we have found that profits are always increasing in the relevant range of k, independent of the bargaining power of the parties and degree of product differentiation: the more the firms behave in a collusive way, the higher their profits are
Summary
Firms’ profitability in vertically related markets is a core topic in industrial economics and organization, and its relevance relies on the fact that (often) input suppliers (and among them, unions as labor suppliers) have relations based on negotiated price (wage) contracts with the producers of the final goods for consumers. Despite the decentralization trend in (wage) negotiations that has taken place in the OECD countries, this bargaining configuration is still extremely relevant in the European Union It represents a central labor market institution in continental Europe The present paper focuses on the effects of different upstream coordination levels in negotiations on downstream firms profitability, stressing the relevance of different levels of downstream market competition/cooperation, measured both by a conjectural variation model, by the conjectural derivative (CD) parameter and the degree of differentiation among goods. While with decentralized input price (wage) bargaining, for a given degree of product differentiation, the higher the upstream suppliers’ bargaining power is, the lower the collusion level is of the downstream firms’ behavior to maximize profits, with bargaining coordination of the upstream input suppliers a U-shaped relation exists between the upstream firms’ bargaining power and the downstream sector’s competition level.
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