Welfare Effects of Buyer and Seller Power
We examine the welfare effects of buyer and seller power in vertically related markets and introduce an empirical approach for quantifying the contribution of each to market power distortions. Our model nests both monopsony distortions from buyer power and double-marginalization distortions from seller power. Rather than imposing either distortion by assumption, we analyze welfare effects when the source of the distortion is unknown. We characterize when buyer and seller power are countervailing or distortionary, offer a test to separate them empirically, and discuss implications for collective bargaining and merger policy. We demonstrate the application of our model in three empirical settings to examine whether (i) labor unions countervail employer monopsony power, (ii) agricultural cooperatives induce double marginalization, and (iii) vertical distortions in coal procurement stem from monopoly or monopsony power.
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Copy CitationMert Demirer and Michael Rubens, "Welfare Effects of Buyer and Seller Power," NBER Working Paper 33371 (2025), https://doi.org/10.3386/w33371.Download Citation
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