Local Monopsony, Free Riding, and Antitrust Policy

Abstract:     
This paper models the development of market structure in industries which are characterized by upstream economies of scale in the distribution of differentiated products to retail firms having local monopoly power within separate geographic areas. Examples are cable television and other mass media. Local retailers have an incentive to exert monopsony power against sellers because of the divergence between average and marginal costs of distributing inputs from upstream. The retailers can increase their ability to exert monopsony power by forming coalitions (that is, chains) across markets. Such coalitions may force input price below the seller's average cost, thus "free riding" on the level of product variety supported by other retail firms. Myopic input price setting by separate retailer coalitions with monopsony power may reduce product variety below industry profit maximizing levels, suggesting that vertical integrations and cartels or other forms of industry-wide cooperative behavior are means to control the level of product variety. Such behavior may increase welfare by restoring the level of product variety toward its socially optimum level. Antitrust applications to the cable television, motion picture, and newspaper industries are discussed.

Number of Pages in PDF File: 24

JEL Classification: L11

working papers series