Bidding for input in oligopoly

Jozsef Sakovics, Roberto Burguet

Research output: Working paperDiscussion paper

Abstract

We present a model where firms producing substitutes bid for inputs (es-
pecially labor) in a decentralized market. We show that downstream market
power increases the intensity of competition for input through a new channel:
local competitive foreclosure. In our model each unit of input (worker) is sold
in a separate local market and firms try not just to get it, but also to keep
it from their rivals. This externality leads to firms targeting the same units
of input and the price of these is bid up. This effect mitigates the output
reducing effect of downstream market power and in the limit (linear Cournot
with constant returns) can even restore efficiency. As a result of coordination,
there exist further equilibria, with prices above cost even with price taking
suppliers - the labor application this leads to involuntary unemployment.
When, instead of targeting, firms post prices, coordination no longer plays
a role and we have a unique(!) equilibrium that clears the market, still internalizing the externality. Finally, we show that targeting can also result in
endogenous market segmentation and price/wage differentials.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages38
Publication statusPublished - 2016

Publication series

NameESE Discussion Papers
No.266

Keywords

  • D43
  • L11
  • L13

Fingerprint Dive into the research topics of 'Bidding for input in oligopoly'. Together they form a unique fingerprint.

Cite this