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Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

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  • Mérel, Pierre
  • Sexton, Richard J.

Abstract

This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products.

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  • Mérel, Pierre & Sexton, Richard J., 2017. "Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 259-293.
    • Handle: RePEc:eee:indorg:v:50:y:2017:i:c:p:259-293
    DOI: 10.1016/j.ijindorg.2016.11.002
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    3. Patrice Bougette & Oliver Budzinski & Frédéric Marty, 2019. "Exploitative Abuse and Abuse of Economic Dependence: What Can We Learn From an Industrial Organization Approach?," Revue d'économie politique, Dalloz, vol. 129(2), pages 261-286.
    4. Federica Di Marcantonio & Pavel Ciaian & Vicente Castellanos, 2018. "Unfair trading practices in the dairy farm sector: Evidence from selected EU regions," JRC Research Reports JRC112770, Joint Research Centre.
    5. He, Xi, 2018. "Bigger Farms and Bigger Food Firms-The Agricultural Origin of Industrial Concentration in the Food Sector," 2018 Annual Meeting, August 5-7, Washington, D.C. 274206, Agricultural and Applied Economics Association.
    6. Maria Garrone & Johan Swinnen, 2018. "Mark-up Volatility in Food Value Chains: Evidence from France and Italy," LICOS Discussion Papers 40318, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    7. Swinnen, Johan & Kuijpers, Rob, 2019. "Value chain innovations for technology transfer in developing and emerging economies: Conceptual issues, typology, and policy implications," Food Policy, Elsevier, vol. 83(C), pages 298-309.
    8. Hadachek, Jeffrey & Saitone, Tina L & Sexton, Richard J & Skorbiansky, Sharon Raszap & Thornsbury, Suzanne & Effland, Anne, 2022. "Organic Feed Grains and Livestock: Factors That Influence Outcomes in Thinly Traded Markets," Economic Research Report 327179, United States Department of Agriculture, Economic Research Service.
    9. Federica Di Marcantonio & Pavel Ciaian & Jan Fałkowski, 2020. "Contracting and Farmers’ Perception of Unfair Trading Practices in the EU Dairy Sector," Journal of Agricultural Economics, Wiley Blackwell, vol. 71(3), pages 877-903, September.
    10. Jinho Jung & Juan Sesmero & Ralph Siebert, 2022. "A structural estimation of spatial differentiation and market power in input procurement," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(2), pages 613-644, March.
    11. Liesbeth Colen & Zohra Bouamra-Mechemache & Victoria Daskalova & Kjersti Nes, 2020. "Retail alliances in the agricultural and food supply chain," JRC Research Reports JRC120271, Joint Research Centre.
    12. Hadachek, Jeffrey & Saitone, Tina L. & Sexton, Richard J. & Raszap Skorbiansky, Sharon & Thornsbury, Suzanne & Effland, Anne, 2022. "Organic Feed Grains and Livestock: Factors That Influence Outcomes in Thinly Traded Markets," USDA Miscellaneous 319355, United States Department of Agriculture.
    13. Maximilian Koppenberg, 2023. "Markups, organic agriculture and downstream concentration at the example of European dairy farmers," Agricultural Economics, International Association of Agricultural Economists, vol. 54(2), pages 161-178, March.

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    More about this item

    Keywords

    Industry concentration; Monopsony power; Hold up; Entry; Merger;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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