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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.

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