Bargaining, mergers, and technology choice in bilaterally oligopolistic industries

We analyze up- and downstream market structure and the choice of technology in a bilaterally oligopolistic industry. The distribution of industry profits between up- and downstream firms is determined by a procedure of bilateral negotiations, which is shown to generate the Shapley value. Incentives for downstream mergers depend on whether upstream firm have increasing or decreasing unit costs, while incentives for upstream mergers depend on whether products are substitutes or complements. Incentives for upstream firms to reduce marginal costs increase with a downstream merger and decrease with an upstream merger Finally, downstream firms may strategically choose a particular market structure to affect upstream technology choice.