Events

Prof. Monica Morlacco
Assistant Professor of Economics
University of Southern California

We study market boundaries in buyer-supplier networks, asking what constitutes the relevant competitive set for pricing when buyers source from few active suppliers despite many alternatives being available. We develop a model in which a single parameter governing market contestability nests full lock-in and full contestability as special cases. This parameter is derived from a buyer’s dynamic search problem and reflects the probability that a buyer accesses the open market before the incumbent relationship dissolves. The equilibrium markup formula shows that higher contestability compresses incumbent market power by expanding the effective demand elasticity. We identify the contestability parameter from the ratio of out-of-network to in-network cross-price elasticities, using firm-level antidumping and countervailing duty tariff activations from the U.S. Federal Register as instruments. Using U.S. buyer-supplier data, we estimate an average contestability of roughly 0.35, rejecting both polar cases. Misidentifying the competitive regime biases markup estimates in opposite directions and misdirects industrial policy: supply diversification interventions such as the CHIPS Act are warranted under low contestability, but distortionary when the competitive fringe already disciplines incumbent pricing.