Abstract

We present a model where firms producing substitutes bid for inputs (especially labor) in a decentralized market. We show that downstream market power increases the intensity of competition for input through a new channel: local competitive foreclosure. In our model each unit of input (worker) is sold in a separate local market and …firms try not just to get it, but also to keep it from their rivals. This externality leads to …rms targeting the same units of input and the price of these is bid up. This effect mitigates the output reducing effect of downstream market power and in the limit (linear Cournot with constant returns) can even restore efficiency. As a result of coordination, there exist further equilibria, with prices above cost even with price taking suppliers –in the labor application this leads to involuntary unemployment. When, instead of targeting, …rms post prices, coordination no longer plays a role and we have a unique(!) equilibrium that clears the market, still internalizing the externality. Finally, we show that targeting can also result in endogenous market segmentation and price/wage differentials