1. Second lecture: The theory of monopoly, monopsony and bilateral monopoly: the standard microeconomic theory and its limits. Third lecture: The theory of vertical integration: the traditional view, the transaction costs economics, the property rights theory. Fourth lecture: Vertical coordination in the food system: evidences, open issues and heterodox approaches. The theory of global value chains.

2. Where f(x)=y is the production function for the commodity y that monopsonist sells on his final market, which is assumed to be competitive; p is the price of y,; x è is the input for which the firm is the only buyer; w is the price of x; w(x) is the input inverse supply function. Monopsony The monopsonist’s profit function is:

3. To maximize profit, set its derivative with respect to x equal to zero:

4. Monopsony

5. Mononopsonist- monopolist

6. Double Marginalization 12 Quantity Retail Price 12 Marginal Cost Q C = 8 Q M = 4 Wholesale Price Q DM =2 4 8

7. Double Marginalization Vertical integration improves social welfare If upstream and downstream merge, then upstream ceases to try to capture surplus from downstream. Upstream prices (transfers) at MC. One deadweight loss eliminated.

8. Contractual Solutions Using “two-part tariffs” can also overcome the double marginalization problem. Recipe for Two-Part Tariffs Part 1: Maximize value created Part 2: Use the fixed fee to capture value

9. Bilateral monopoly

10. Bilateral monopoly is a market structure characterized by the presence of a single buyer and a single seller, i.e. the combination of a monopoly market and a monopsony market. When the buyer and seller maximize their profit independently they set different prices and an equilibrium cannot be reached. Consequently, not considering the case of vertical integration and exchange failure, the parties are forced to negotiate a price and a quantity. Where the solution ends ups depends on the way the negotiating process occurs and on the relative bargaining power of each side. Bilateral monopoly can be analyzed as a two person game whose sum (which can be called the surplus) is positive if the players reach an agreement on its division, otherwise zero.

11. Game theory offers a good deal of bargaining models. The classical one is the Nash bargaining model. In the Nash game each player i (i=1,2) chooses a real number called her payoff demand, simultaneously and independently with respect to the other player. If the payoff vector lies in the payoff space P of the game each player will receive the payoff that she has been asking for. In contrast, if, the players’ payoff demands are incompatible and each player will receive only his conflict payoff c i

12. Nash’s basic assumption is that this bargaining situation has a determinate solution at least in one special case, that is with complete players’ symmetry. In this special case the natural prediction is that the two players will agree on equal payoffs to both of them. A symmetric game must have a unique symmetric solution. The Nash bargaining solution lies on the following four postulates: joint efficiency; symmetry, linear invariance, independence of irrelevant alternatives (i.e. invariance with respect to irrelevant restrictions of the payoff space).

13. The Nash bargaining model is not a strict non- cooperative game, because of the axiomatic approach used to find out the solution. Subsequent non-cooperative bargaining models cover situations that not necessarily satisfy the Nash bargaining axioms. Most of them are grounded on the Rubinstein bargaining model with alternating offers (Rubinstain, 1982).

14. The cooperative game theory, applying to situations where the players can communicate and make binding commitments, offer solutions to the bargaining problem based on the solution concept of Shapley value. The cooperative bargaining solutions identify the maximum overall amount of value created through the exchange and the conditions to let players participate to the exchange (the core concept is the marginal contribution of a player that is the amount by which the overall value would shrink if the player in question were to leave the game), but do not specify how the residual value –what remains after competition has been accounted for- will end up. “After all, where this leads would seem to depend on ‘intangibles’ such as how skilled different players are at persuasion” (Brandenburger, 2002).

15. The attempts of the game theory to solve the exchange indeterminacy in bilateral monopoly contexts, -i.e. when the exchange outcome depends no more on the anonymous supply and demand forces, but on the “personal” bargaining power of the buyer and the seller-, all rely on the assumption of rational behaviour of economic actors. In particular game theory is a theory of rational behaviour in a social setting that maintains the selfishness postulate of the economic standard model. It deals with “the rational pursuit of self-interest and of personal values against other individuals rationally pursuing their own self-interest and their own personal value” Harsany, 1977, p.11). 1 1 In that it is different from ethics, that is “the theory of rational behaviour in a social setting dealing with the rational pursuit of the interest of society as a whole” (Harsany).

16. In contrast with the pure theoretical game theory, experimental game theory demonstrated that the strong rational behaviour hypotheses do not hold in the real world. As a consequence the Homo economicus, typical of the standard rational choice model, must be sometimes substituted by new personas such as the Homo reciprocans, the Homo egualis and the Homo parochius (Gintis, 2000, pp.251-252). Negotiating experiments showing bargaining outcomes consistent with these different kinds of behaviours have been developed stemming from the Ultimatum game originally envisaged by Güth, Werner, Schmittberger, and Schwarze (1982).Güth

17. The original ultimatum game represents a stylized negotiating setting where two anonymous players must split an amount in a one shot situation with a first mover (the proposer) who makes an offer and the second mover (the respondent) replies choosing to accept or reject the offer. If the respondent accepts both the players gain the offered amount, otherwise neither gets anything. According to the standard game theory only a subgame perfect equilibrium exists that gives the respondent the smallest (non-zero) amount possible and the proposer the remaining amount. This theoretical result is never attained in the experiments. Instead there are a wide range of results with a good deal of people offering "fair" (e.g., 50:50) splits; and with offers of less than 20% being often rejected.

18. These recent developments of game theory highlight the difficulties of dealing with bilateral monopoly contexts, considering descriptive as well normative and predictive level of analysis. Outcomes of bilateral monopolies depend on many social, economic and psychological factors and often do not respect pareto optimality requisites. Since these factors are not analyze by the standard model, it is difficult to evaluate the exchange performance and to suggest regulatory interventions. Moreover, because in bilateral monopoly the distributive conflict is at the core of the process leading to the market equilibrium, the politics (i.e. the power issue) of the economic activity emerges as the very relevant analytical issue.