Working Paper: NBER ID: w22219
Authors: Claudia Müllers; Hans-Theo Normann; Christopher M. Snyder
Abstract: When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all three firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash bargaining fits the pattern of shifting surpluses well. We conclude with a discussion of the antitrust implications of open communication in vertical markets.
Keywords: communication; vertical markets; monopolization; antitrust; experimental evidence
JEL Codes: C70; C90; K21; L42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Private communication (L96) | Commitment problem mitigation (D86) |
| Private communication (L96) | Total offered quantity (D44) |
| Two-way communication (L96) | Total offered quantity (D44) |
| Three-way communication (Z00) | Total offered quantity (D44) |
| Open communication (L96) | Monopolization (L12) |
| Open communication (L96) | Downstream firms' profits (L21) |
| Communication (L96) | Restrictions on output (C67) |
| Communication (L96) | Reinforcement of monopolistic behavior (L12) |