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.
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.
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