Price-Cost Margins and Successive Market Power

Abstract

The aim of this paper is to investigate the impact on an industry's price-cost margin of firms in downstream industries having seller market power. We develop a detailed theoretical model based upon Cournot's work in this area which predicts that margins are raised by an increase in successive market power of this type. Our prediction contrasts with work by Lustgarten, who found that bilateral market power depressed margins; we explain our result intuitively in terms of two opposing effects. In our regression analysis on U. K. data we test the two hypotheses simultaneously and find both confirmed.