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Abstract
The use of complementary inputs is a key characteristic of the production process in
many food related industries. In this article we explore how market power in a
complementary input sector compares to the exertion of market power in a downstream
sector for both producer and consumer welfare, as well as for policy. We develop a
model of a homogenous product market that encompasses both bilateral and
complementary relationships. The model focuses on the primary input sector and allows
for exertion of market power by both complementary input suppliers and downstream
firms. We use comparative statics analyses and numerical simulations to study the
economic equilibrium under different scenarios of market power exertion. With respect to
the welfare of primary input suppliers, our main finding is that market power exercised
by the supplier of a complementary input generates greater negative effects than the same
level of market power exercised by the downstream firms. We provide a discussion of the
implications of the results for policy in the context of current problems within the
Canadian grain handling and transportation system.