Competitive Hold-Up: Monopoly Prices Too High to Maximize Profits when Retailers or Complement Goods Are Perfectly Competitive

30 Pages Posted: 21 Jan 2017 Last revised: 13 Aug 2017

See all articles by Eric Bennett Rasmusen

Eric Bennett Rasmusen

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: August 12, 2017

Abstract

If a monopolist (any manufacturer with downward-sloping demand) cannot commit to a wholesale price in advance, even competitive retailers will be reluctant to enter the market, knowing that once they have entered, the monopolist has incentive to choose a higher price and reduce their quasi-rents. Retailers earn zero profits in the long run, but this hurts the monopolist by shifting in the retailer short-run supply curve. I call this inefficiently high price "competitive hold-up". A similar problem occurs if the monopolist's product is sold directly to consumers but is complementary to a product sold by a competitive industry. Competitive hold-up arises from upstream opportunism, not downstream market power, and so is distinct from two problems that look superficially similar, double marginalization and the two-monopoly complements externality.

Keywords: Monopoly, holdup-costs, opportunism, competitive hold-up, quasi-rents, complements, double marginalization, retailers

JEL Classification: D23, D42, D86, L14, L23

Suggested Citation

Rasmusen, Eric Bennett, Competitive Hold-Up: Monopoly Prices Too High to Maximize Profits when Retailers or Complement Goods Are Perfectly Competitive (August 12, 2017). Kelley School of Business Research Paper No. 17-8. Available at SSRN: https://ssrn.com/abstract=2902072 or http://dx.doi.org/10.2139/ssrn.2902072

Eric Bennett Rasmusen (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Enter your address line 1 here
Enter your address line 2 here
Bloomington, IN Enter your state here 47405
United States
812-855-9219 (Phone)
812-855-3354 (Fax)

HOME PAGE: http://rasmusen.org

Register to save articles to
your library

Register

Paper statistics

Downloads
27
Abstract Views
212
PlumX Metrics