Local Monopsony and Free Riders
Information Economics and Policy, Vol. 8, No. 4
Posted: 15 Apr 1998
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: Suggested Citation