Economics Brown Bag Seminar Series – Leslie Marx (Duke University)

Room 605, Level 6, FBE Building, 111 Barry Street, Carlton

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Faisal Sohail and Aaron Barkley

Title: Countervailing Power, Vertical Integration, and Investment: An Incomplete Information Approach (joint with Simon Loertscher)

Abstract: We analyze a procurement setup with incomplete information and an endogenous price formation process whose efficiency properties depend on the bargaining weights of the buyer and the suppliers. Keeping bargaining weights fixed, a merger never increases and sometimes decreases social surplus. However, a merger that levels the playing field by equalizing bargaining weights can increase social surplus. Moreover, there is no basis for the presumption that vertical integration increases social surplus because the vertical market structure affects the efficiency of price formation. We also show that equilibrium investments are efficient if and only if price formation is efficient, which contrasts sharply with complete information models. Extensions analyze bargaining breakdown, supplier-specific preferences, multi-object demand, and bargaining externalities.