A THEORY OF BILATERAL OLIGOPOLY |
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| Authors: | KENNETH HENDRICKS R PRESTON MCAFEE |
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| Institution: | 1. Hendricks: Department of Economics, University of Texas at Austin, Austin TX 78712.;2. McAfee: Yahoo! Research, 3333 Empire Blvd., Burbank, CA 91504. Phone 818‐524‐3290, Fax 818‐524‐3102, Email mcafee@yahoo‐inc.com;3. We thank Jeremy Bulow and Paul Klemperer for their useful remarks and for encouraging us to explore downstream concentration. |
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| Abstract: | In horizontal mergers, concentration is often measured with the Hirschman–Herfindahl Index (HHI). This index yields the price–cost margins in Cournot competition. In many modern merger cases, both buyers and sellers have market power, and indeed, the buyers and sellers may be the same set of firms. In such cases, the HHI is inapplicable. We develop an alternative theory that has similar data requirements as the HHI, applies to intermediate good industries with arbitrary numbers of firms on both sides, and specializes to the HHI when buyers have no market power. The more inelastic is the downstream demand, the more captive production and consumption (not traded in the intermediate market) affects price–cost margins. The analysis is applied to the merger of the gasoline refining and retail assets of Exxon and Mobil in the western United States. (JEL L13, L41) |
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