Competitive Hold-Up: Monopoly Prices Too High to Maximize Profits when Retailers or Complement Goods Are Perfectly Competitive

Abstract

If a monopolist (any manufacturer with downward-sloping demand) cannot commit to a wholesale price in advance, even competitive retailers will be reluctant to enter the market, knowing that once they have entered, the monopolist has incentive to choose a higher price and reduce their quasi-rents. Retailers earn zero profits in the long run, but this hurts the monopolist by shifting in the retailer short-run supply curve. I call this inefficiently high price "competitive hold-up''. A similar problem occurs if the monopolist's product is sold directly to consumers but is complementary to a product sold by a competitive industry. Competitive hold-up arises from upstream opportunism, not downstream market power, and so is distinct from two problems that look superficially similar, double marginalization and the two-monopoly complements externality.