The paper presents a model of duopoly in which firms acquire inputs through bilateral monopoly relations with suppliers. It combines a bargaining model with a duopoly model to examine how input prices and profits are affected by the structures of the upstream and the downstream industries, by the demand relations among the final products, and by the nature of the bargaining between the suppliers and firms. The implications for the incentives for merger turn out to be significantly different from what they would be in an alternative environment where prices are not determined in bargaining.
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