On input market surplus and its relation to the downstream market game

Abstract In order to analyze the welfare effects of price changes in input markets – following for example a price‐fixing conspiracy – economists have studied the relationship between the surplus measured in the input markets and the surplus in the output markets. The latest results hinge on simplifying assumptions, which are relaxed here by linking the input markets surplus question to another stream of literature, which characterizes functions that oligopolists collectively, yet unintentionally, maximize. It is shown that the area under the input demands is equal to the change in a function for which critical points coincide with the equilibria of the downstream game. A particular case of these functions is the exact potential function.