Markups, Markdowns, and Bargaining in a Vertical Supply Chain

This article bridges monopoly, monopsony, and countervailing power theories to analyze the welfare effects of seller and buyer power in a vertical supply chain. We develop a bilateral monopoly with bargaining over a linear price, where the upstream firm sources input from an increasing supply curve, exerting monopsony power mirroring the downstream firm monopoly power. We leverage the shortside rule to endogenize which side sets the quantity traded in equilibrium. We show that welfare is maximized when each firm's bargaining power fully countervails the other's market power. Otherwise, double marginalization occurs: double markupization arises when the upstream firm holds excessive bargaining power, and double markdownization in the opposite case. Our analysis yields novel insights for policy intervention and empirical research.