Journal of Regulatory Economics

, Volume 27, Issue 3, pp 263–280 | Cite as

Privately-Negotiated Input Prices

  • David E. M. Sappington
  • Burcin Unel


We examine settings where input prices are negotiated by industry suppliers, rather than dictated by regulators. We find that the input buyer may agree to pay a high price for an input because the high price serves to reduce the intensity of retail price competition with the input seller. Full exploitation of retail customers can result. However, retail price regulation, competition among buyers, and product heterogeneity all can limit the extraction of consumer surplus. We also identify conditions under which input price negotiations will fail to produce a mutually agreeable input price.


input prices negotiation regulation 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Armstrong, M. 1998‘‘Network Interconnection in Telecommunications’’.Economic urnal108545564Google Scholar
  2. Armstrong M. 2002. ‘‘The Theory of Access Pricing and Interconnection.’’ In Handbook of Telecommunications Economics: Volume I, edited by M. Cave, S. Majumdar, and I. Vogelsang. Amsterdam: North-Holland.Google Scholar
  3. Armstrong, M., Cowan, S., Vickers, J. 1994Regulatory Reform: Economic Analysis and British ExperienceThe MIT PressCambridge, MAGoogle Scholar
  4. Baumol, W., Sidak, J. G. 1994‘‘The Pricing of Inputs Sold to Competitors’’.Yale Journal on Regulation11171202Google Scholar
  5. Beard, T. R., Kaserman, D., Mayo, J. 2001‘‘Regulation, Vertical Integration, and Sabotage’‘Journal of Industrial Economics49319333Google Scholar
  6. Binmore, K., Rubinstein, A., Wolinsky, A. 1986‘‘The Nash Bargaining Solution in Economic Modeling’’.Rand Journal of Economics17176188Google Scholar
  7. Carter, M., Wright, J. 2003‘‘Asymmetric Network Interconnection’’.Review of Industrial Organization222746Google Scholar
  8. Chen, Y. 2001‘‘On Vertical Mergers and their Competitive Effects’’.Rand Journal of Economics32667685Google Scholar
  9. Dessein, W. 2003‘‘Network Competition in Nonlinear Pricing’’.Rand Journal of Economics34593611Google Scholar
  10. Federal Communications Commission. 1996. {\it Implementation of the Local Competition Provisions in the Telecommunications Act of 1996}, First Report and Order, CC Docket Nos. 96--98, 95--185 (Released August 8). Google Scholar
  11. Hotelling, H. 1929‘‘Stability in Competition’’.Economic Journal394157Google Scholar
  12. Laffont, J., Rey, P., Tirole, J. 1998a‘‘Network Competition: I. Overview and Nondiscriminatory Pricing’‘Rand Journal of Economics29137Google Scholar
  13. Laffont, J., Rey, P., Tirole, J. 1998b‘Network Competition: II. Price Discrimination’‘Rand Journal of Economics293856Google Scholar
  14. Latour A. ‘‘Qwest and MCI Set Lease Rates for Local Service’’. Wall Street Journal 2004. ; (June 1): A3, A13.Google Scholar
  15. Mandy, D. 2000‘‘Killing the Goose that Laid the Golden Egg: Only the Data Know Whether Sabotage Pays’’.Journal of Regulatory Economics17157172Google Scholar
  16. Powell M. 2004. ‘‘Remarks at the National Association of Regulatory Commissioners General Assembly’’. Available at Scholar
  17. Richtel M. 2004. ‘‘SBC, Tired of Courts and Regulators, Offers to Settle Network Leasing Issue’’. New York Times (March 4): C4.Google Scholar
  18. Rosston, G., Noll, R. 2002‘‘The Economics of the Supreme Court’s Decision on Forward Looking Costs’‘Review of Network Economics18189Google Scholar
  19. Roth, A. 1979Axiomatic Models of BargainingSpringer-VerlagBerlinGoogle Scholar
  20. Sappington D. 2005. ‘‘On the Irrelevance of Input Prices for Make or Buy Decisions’’. American Economic Review (forthcoming).Google Scholar
  21. Sappington, D. 2005. ‘‘On the Irrelevance of Input Prices for Make or Buy Decisions.’’ American Economic Review (forthcoming). Google Scholar
  22. Sibley, D., Weisman, D. 1998‘‘Raising Rivals’ Costs: The Entry of an Upstream Monopolist into Downstream Markets’’.Information Economics and Policy10451470Google Scholar
  23. Skreta, V. 2004‘‘Interconnection Negotiations Between Telecommunication Networks and Universal Service Objectives’‘University of MinnesotamimeoGoogle Scholar
  24. Unel, B. 2004‘‘International Strategic Alliances: Effects on Welfare’‘University of FloridamimeoGoogle Scholar
  25. Vogelsang, I. 2003‘‘Price Regulation of Access to Telecommunications Networks’’.Journal of Economic Literature41830862Google Scholar

Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of FloridaGainesville

Personalised recommendations