What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co

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 investment 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.

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Reference

Guillem Roig, “What Determines Market Structure? An Explanation from Cooperative Investment with Non‐Exclusive Co”, TSE Working Paper, n. 14-482, March 26, 2014.