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Bilateral Monopoly Revisited: Price Formation, Efficiency and Countervailing Powers

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  • Toxvaerd, Flavio

Abstract

In this paper, I revisit and synthesize the rich literature on price formation in bilateral monopoly. I show how traditional flat-rate price posting (e.g. price setting and price taking) is akin to Nash bargaining over wholesale price with subsequent 'right-to-manage', while two-part tariffs are akin to 'bilaterally efficient' Nash bargaining over both wholesale price and quantity. Outcomes under the former protocol nest price posting and the cases of pure monopoly and pure monopsony. Outcomes under the latter protocol nest all-or-nothing offers and the Walrasian outcome under two-sided price taking and trace out the contract curve. With lopsided bargaining power, outcomes under right-to-manage can lead to socially superior outcomes to those that are bilaterally efficient. Last, effects of bargaining power on markups and markdowns are characterized.

Suggested Citation

  • Toxvaerd, Flavio, 2024. "Bilateral Monopoly Revisited: Price Formation, Efficiency and Countervailing Powers," CEPR Discussion Papers 19338, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19338
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    More about this item

    Keywords

    Bilateral monopoly;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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