Bargaining and Dynamic Competition

Industries with significant scale economies or learning-by-doing may come to be dominated by a single firm. Economists have studied how likely this is to happen, and whether it is efficient, using models where buyers are price or quantity takers, even though these industries are often also characterized by buyer-seller negotiations. We extend the dynamic “learning-by-doing and forgetting” model of Besanko, Doraszelski, Kryukov, and Satterthwaite (2010) to allow for Nash-in-Nash bargaining over prices. Price-taking and the social planner solution are captured as special cases. We show that sellers’ dynamic incentives, market concentration and welfare can change sharply, and non-monotonically, as one moves away from the price-taking assumption. We study the implications of buyer bargaining power for the existence of multiple equilibria, the design of subsidy policies and the welfare effects of policies designed to increase competition.