A Theory of Bilateral Oligopoly

24 Pages Posted: 29 Mar 2010

See all articles by Kenneth Hendricks

Kenneth Hendricks

University of Texas at Austin - Department of Economics

R. Preston McAfee

California Institute of Technology - Division of the Humanities and Social Sciences; Yahoo! - Yahoo! Research Labs

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Abstract

In horizontal mergers, concentration is often measured with the Hirschman-Herfindahl Index (HHI). This index yields the price-cost margins in Cournot competition. In many modern merger cases, both buyers and sellers have market power, and indeed, the buyers and sellers may be the same set of firms. In such cases, the HHI is inapplicable. We develop an alternative theory that has similar data requirements as the HHI, applies to intermediate good industries with arbitrary numbers of firms on both sides, and specializes to the HHI when buyers have no market power. The more inelastic is the downstream demand, the more captive production and consumption (not traded in the intermediate market) affects price-cost margins. The analysis is applied to the merger of the gasoline refining and retail assets of Exxon and Mobil in the western United States.

Keywords: L13, L41

Suggested Citation

Hendricks, Kenneth and McAfee, Randolph Preston and McAfee, Randolph Preston, A Theory of Bilateral Oligopoly. Economic Inquiry, Vol. 48, Issue 2, pp. 391-414, April 2010, Available at SSRN: https://ssrn.com/abstract=1578525 or http://dx.doi.org/10.1111/j.1465-7295.2009.00241.x

Kenneth Hendricks (Contact Author)

University of Texas at Austin - Department of Economics ( email )

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United States
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Randolph Preston McAfee

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

Yahoo! - Yahoo! Research Labs ( email )

Sunnyvale, CA 94089
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