What Determines Market Structure? An Explanation from Cooperative Investment with Non-Exclusive Contracts Working Paper

abstract

  • In a common agency setting, where the common buyer undertakes cooperative investment with her suppliers, we obtain a direct link between the level of ex-post competition and in- vestment which affects the market structure of the supply side of the market. We show that more competitive equilibria are associated with a larger and more homogeneous distribution of investment among active suppliers, and an equilibrium with no investment might occur when competition is mild. In our model, buyer’s investment works as a mechanism to incentivize competition, and its effectiveness is positively related to the level of competition ex-post. In general, the equilibrium investment profile is lower than efficiency, and we surprisingly find that higher competitive markets may sustain a larger number of suppliers.

publication date

  • 2014-3-1

keywords

  • Buyers
  • Common Agency
  • Competitive Equilibrium
  • Competitive Market
  • Exclusive Contracts
  • Market Structure
  • Suppliers
  • Supply Side

number of pages

  • 44