Welfare reducing vertical integration in a bilateral monopoly under Nash bargaining

Mukherjee, Arijit; Sinha, Uday Bhanu

Abstract

We consider a bilateral monopoly where a linear input price is determined by Nash bargaining. We show with an increasing marginal cost of input production that vertical integration reduces consumer surplus and welfare compared to bilateral monopoly if the bargaining power of the input supplier is low. This result is important for competition policies as it questions the common wisdom suggesting vertical integration increases welfare by eliminating the problem of double marginalisation. Over production under bilateral monopoly compared to vertical integration is the reason for our result. Interestingly, consumer surplus and welfare can be higher under a linear input price compared to a two-part tariff input price.

Citation

Mukherjee, A., & Sinha, U. B. (2024). Welfare reducing vertical integration in a bilateral monopoly under Nash bargaining. Journal of Public Economic Theory, 26(3), Article e12701. https://doi.org/10.1111/jpet.12701

• Journal Article Type: Article
• Acceptance Date: May 20, 2024
• Online Publication Date: May 30, 2024
• Publication Date: 2024-06
• Deposit Date: Jun 21, 2024
• Publicly Available Date: Jun 24, 2024
• Journal: Journal of Public Economic Theory
• Print ISSN: 1097-3923
• Electronic ISSN: 1467-9779
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 26
• Issue: 3
• Article Number: e12701
• DOI: https://doi.org/10.1111/jpet.12701
• Keywords: Bilateral monopoly; Convex cost; Over production; Vertical integration; Welfare JEL Classifications: D42; D43; L12; L13
• Public URL: https://nottingham-repository.worktribe.com/output/36302991
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1111/jpet.12701