Bilateral Monopoly Revisited: Price Formation, Efficiency and Countervailing Powers

Flavio Toxvaerd

No 19338, CEPR Discussion Papers from Centre for Economic Policy Research

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, 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, but may also lead to socially inferior over production. Last, effects of bargaining power on markups, markdowns and cost pass-through are characterized.

Keywords: Bilateral; monopoly (search for similar items in EconPapers)
JEL-codes: C78 D42 J42 L13 L42 (search for similar items in EconPapers)
Date: 2024-08
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