A Theory of Bilateral Oligopoly

38 Pages Posted: 23 Sep 2004

See all articles by R. Preston McAfee

R. Preston McAfee

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

Kenneth Hendricks

University of Texas at Austin - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2000

Abstract

In horizontal mergers, concentration is often measured with the Hirschmann-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 market power 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 California gasoline refining and retail assets of Exxon and Mobil.

Suggested Citation

McAfee, Randolph Preston and McAfee, Randolph Preston and Hendricks, Kenneth, A Theory of Bilateral Oligopoly (June 7, 2000). Available at SSRN: https://ssrn.com/abstract=594605 or http://dx.doi.org/10.2139/ssrn.594605

Randolph Preston McAfee (Contact Author)

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
United States

Kenneth Hendricks

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

Austin, TX 78712
United States
512-475-8532 (Phone)
512-471-3510 (Fax)

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