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.
Highlights
Modern oligopolistic markets often require building infrastructure with costly transportation on it
To reduce vulnerability of buyers to market power exercised by the supply side, we identify the minimal infrastructure that generates the maximal aggregate consumer surplus among all infrastructures
Each buyer exclusively trades with his most-efficient supplier on the infrastructure against a price that equals this supplier’s marginal costs and pays a positive fee
Summary
Modern oligopolistic markets often require building infrastructure with costly transportation on it. We analyze competition in both prices and fees in an oligopolistic market with a finite number of concentrated buyers and suppliers, who are both heterogeneous and exercise market power, on a given non-expandable infrastructure that transports some perfectly-divisible good.1 Marginal costs of both production and transportation are constant and relation-specific. We demonstrate how assignment games as first proposed by Shapley and Shubik (1972) can be employed as a tool in competition economics to analyze complex and policy-relevant environments, market efficiency and buyers’ vulnerability to market power in spot-markets on infrastructures that cannot be expanded in the short run, such as infrastructure for natural gas To address this we identify the minimal infrastructure that generates maximal aggregate joint welfare among all infrastructures.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
