Standard models of market power assume firms are price-takers in their input markets. They buy materials at given prices, exercise monopoly or oligopoly power on the output side, and the analysis focuses on downstream distortions. Bizzarri shows this assumption is not just simplifying — it is distorting.
When firm-to-firm trade is modeled as bilateral negotiation where firms can affect prices in both input and output markets simultaneously, the equilibrium changes in predictable but systematically ignored ways. Firms squeeze their suppliers and their customers at the same time. The standard model, which restricts market power to one direction, underestimates final consumer prices and overestimates the surplus captured by upstream firms. The supplier isn't getting a fair deal — the buyer is pushing input prices down while marking up output prices. Both margins are exercised simultaneously.
The error compounds through production networks. When an intermediate firm exercises bilateral market power, the distortion propagates both upstream (lower supplier prices) and downstream (higher consumer prices). Merger analysis that ignores bilateral power misjudges welfare impacts because it misattributes surplus between upstream and downstream parties.
The through-claim is about the asymmetry of simplification. Restricting market power to one side of the transaction is not a conservative assumption — it is a biased one. It systematically understates the power of firms that sit at network nodes with both upstream and downstream connections. The bias is invisible because the simplification appears symmetric: “assume no power in input markets” sounds like it removes an effect. It does — but it removes the effect that would raise output prices and lower input prices, creating a specific directional error. Simplification is not neutral. It has a direction.