Local Monopsony and Free Riders

Information Economics and Policy, Vol. 8, No. 4

Posted: 15 Apr 1998

See all articles by David Waterman

David Waterman

Indiana University - Department of Telecommunications

Abstract

In an industry with upstream economies of scale in the distribution of differentiated products to retailers which have monopoly power within separate local market areas, the retailers have an incentive to exert monopsony power due to the divergence between average and marginal costs in the distribution of these inputs. The retailers increase their ability to exert monopsony power by forming coalitions (that is, chains) across local markets. Sufficiently large retail chains may force input price below the seller?s average cost, thus ?free riding? on the level of product variety supported by other retailers. Vertical integration, cartels, or other cooperative behavior, however, can be means to control the level of product variety, and may increase both industry profits and economic welfare. Policy applications to the cable television, motion picture, and pharmaceutical industries are discussed.

Key words: Monopsony, Vertical Integration, Cable television; Motion Pictures; Pharmaceutical

JEL Classification: L11

Suggested Citation

Waterman, David, Local Monopsony and Free Riders. Information Economics and Policy, Vol. 8, No. 4. Available at SSRN: https://ssrn.com/abstract=76208

David Waterman (Contact Author)

Indiana University - Department of Telecommunications ( email )

1229 East 7th Street
Bloomington, IN 47405
United States
812-855-6170 (Phone)

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