The Department of Economics is pleased to invite you to a Micro seminar with Etienne Guigue, LMU Munich.
This article bridges monopoly, monopsony, and countervailing power theories to analyze the welfare effects of seller and buyer power in a vertical supply chain. We develop a bilateral monopoly setting with bargaining over a linear price, where the upstream firm sources input from an increasing supply curve, exerting monopsony power mirroring the downstream firm monopoly power. In equilibrium, the short-side rule applies, meaning that the quantity traded is determined by the firm that is willing to trade the smaller amount. We show that welfare is maximized when each firm’s bargaining power exactly countervails the other’s market power. Otherwise, double marginalization occurs: double markupization arises when the upstream firm holds excessive bargaining power, and double markdownization in the opposite case. Our analysis yields novel insights for policy intervention and empirical research.