Bilateral monopolies and location choice

Abstract

We analyse how equilibrium locations in location-price games à la Hotelling are affected when firms acquire inputs through bilateral monopoly relations with suppliers. Assuming a duopoly downstream market with input price bargaining, we find that the presence of input suppliers changes the locational incentives of downstream firms in several ways, compared with the case of exogenous production costs. Bargaining induces downstream firms to locate further apart, despite the fact that input prices increase with the distance between the firms. Furthermore, the downstream firm facing the stronger input supplier has a strategic advantage and locates closer to the market centre.