Another Kind of Power: Labor Market Outcomes and Antitrust Legislation

Abstract: Large corporate entities that dominate the business world often make it difficult for their relatively smaller and local counterparts to compete. In this scenario, if the smaller player (operating independently) shuts down business and opts to work or produce under contract for the larger firm, it is the reduced profitability of the smaller firm that will constitute the benchmark against which the contract is designed. This benchmark - that is, the reservation utility, is typically taken as exogenously given in economic theory and it is the possibility of reservation utility being endogenous that this paper formally explores. This is done by allowing the larger firm to undertake investments that not only reduce its own costs but also induce lower profitability for the smaller player. The analysis specifically highlights the labor market channel through which economic power of large corporations is manifested and also the corresponding ramifications for antitrust law.