Structural implications of vertical relationships between manufacturing and retailing

The paper reviews the implications of vertical relationships in the fast moving consumer goods markets. Concentration in retailing has changed the balance of power between large brand manufacturers and retailers, making effective the countervailing power that Galbright pointed out in his 1952 book. Through the allocation of space in their stores and selective delisting of products from their assortments, large retailers can obtain lower prices from their suppliers which are then passed on to consumers. Rents obtained by brand manufacturers are reduced and, to improve their margins, they are also lead to dealing more aggressively with their own suppliers. In this way competition in retailing spills over vertically and improves the efficiency of the entire value chain. Moreover, retailers also challenge the market power of their suppliers offering to consumers their own brands. This plays as an indirect stimulus to innovation as manufacturers have to propose new products to make more difficult to retailers to copy existing ones and obtain part of their market. Therefore, it is emphasized how a competitive retail system has widespread implications on the overall efficiency of the economy.