Multilateral Market Power in Input-Output Networks

Abstract: This paper models firm-to-firm trade in a production network as a set of double auctions. Firms have multilateral market power, namely, can affect prices in both input and output markets. The size and division of surplus are endogenous and depend only on technology, network position, and consumer preferences. The standard simplifying assumption of price-taking on input markets (unilateral market power) has systematic effects: it underestimates the final price and overestimates the surplus going upstream. These phenomena affect the model predictions for the welfare impact of mergers.