Abstract
A joint venture with market power benefits from restricting its output which, in turn, requires the partners to restrict the supply of their inputs. However, since each partner benefits only partially from restricting its input, both over–supply their inputs from the viewpoint of the optimal use of market power. We show that this pecuniary negative externality in the partners’ input decisions mitigates the standard under–provision problem that arises in joint ventures. We also show that the degree of this problem declines as demand becomes less elastic.
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