Supply and demand function competition in input-output networks
Matteo Bizzarri · 2024
This paper provides a strategic non-cooperative model of large firms interacting in an input-output network consisting of many specific supply-customer relationships, with an application to mergers. It does so introducing the technique of competition in schedules, or supply and demand functions, to the modeling of general equilibrium oligopoly. The main interest lies in the fact that such a technique allows to have a fully strategic model in which firms understand and take into account their position in the network, and have market power on both inputs and outputs markets simultaneously, in an endogenously determined way. These features are rarely both present in input-output models of the macroeconomy, but I argue that they are important to analyze market power in input-output networks. For example, I show that they can generate large differences in the ranking of market power across firms or sectors with respect to a model where market power is one-sided, as in the classic sequential Cournot. This implies different evaluations of the welfare impact of mergers. The effect is particularly stark especially when supply chains are long. These results suggest that the technique of competition in supply and demand functions can be important for the researcher interested in analyzing and estimating economies with market power, especially in the presence of complex input-output networks.