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Incomplete Information Bargaining with Applications to Mergers, Investment, and Vertical Integration

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  • Simon Loertscher
  • Leslie M. Marx

Abstract

We provide an incomplete information bargaining framework that captures the effects of differential bargaining power in markets with multiple buyers and multiple suppliers. The market is modeled as a mechanism that maximizes the expected weighted welfare of the firms, subject to the constraints of incentive compatibility, individual rationality, and no deficit. We show that, in this model, there is no basis for the presumption that vertical integration increases equally weighted social surplus, while it is possible that horizontal mergers that appropriately change bargaining weights increase social surplus. Moreover, efficient bargaining implies that in equilibrium noncontractible investments are efficient.

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  • Simon Loertscher & Leslie M. Marx, 2022. "Incomplete Information Bargaining with Applications to Mergers, Investment, and Vertical Integration," American Economic Review, American Economic Association, vol. 112(2), pages 616-649, February.
    • Handle: RePEc:aea:aecrev:v:112:y:2022:i:2:p:616-49
    DOI: 10.1257/aer.20201092
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    Cited by:

    1. Shota Ichihashi & Alex Smolin, 2023. "Buyer-Optimal Algorithmic Consumption," Papers 2309.12122, arXiv.org, revised Sep 2024.
    2. Simon Loertscher & Leslie M. Marx, 2023. "Bilateral Trade with Multiunit Demand and Supply," Management Science, INFORMS, vol. 69(2), pages 1146-1165, February.
    3. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2022. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity [“Redistribution through Markets,”]," The Quarterly Journal of Economics, Oxford University Press, vol. 137(4), pages 2499-2537.
    4. Goerlach, Joseph-Simon & Motz, Nicolas, 2024. "A General Measure of Bargaining Power for Non-cooperative Games," IZA Discussion Papers 16809, Institute of Labor Economics (IZA).
    5. Bianchi, Milo & Yamashita, Takuro, 2024. "Optimal Investment in Network Infrastructures," TSE Working Papers 1560, Toulouse School of Economics (TSE).
    6. Zoë B. Cullen & Bobak Pakzad‐Hurson, 2023. "Equilibrium Effects of Pay Transparency," Econometrica, Econometric Society, vol. 91(3), pages 765-802, May.
    7. Chambolle, Claire & Christin, Clémence & Molina, Hugo, 2023. "Buyer power and exclusion: A progress report," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    8. Duha Altindag & Samuel Cole & R. Alan Seals Jr, 2022. "The Price of COVID-19 Risk in a Public University," Papers 2204.00894, arXiv.org.
    9. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2023. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity," Journal of Economic Geography, Oxford University Press, vol. 137(4), pages 2499-2537.
    10. Soumen Banerjee, 2023. "Combating Algorithmic Collusion: A Mechanism Design Approach," Papers 2303.02576, arXiv.org, revised Jul 2023.
    11. David P Byrne & Leslie A Martin & Jia Sheen Nah, 2023. "Price Discrimination by Negotiation: a Field Experiment in Retail Electricity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(4), pages 2499-2537.

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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