Welfare Effects of Buyer and Seller Power
We provide a theoretical characterization of the welfare effects of buyer and seller power in vertical relations and introduce an empirical approach for quantifying the contributions of each to the welfare losses from market power. Our model accommodates both monopsony distortions from buyer power and double-marginalization distortions from seller power. Rather than imposing one of these vertical distortions by assumption, we allow them to arise endogenously based on model primitives. We show that the relative elasticity of upstream supply and downstream demand is the key determinant of whether buyer or seller power creates a market power distortion. Applying our framework to coal procurement by power plants in Texas, we attribute 74.9% of the distortion to monopoly power of coal mines, with the remainder attributed to the monopsony power of power plants.
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