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Buyer's Strategies, Entry Barriers, and Competition

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  • Scheffman, David T
  • Spiller, Pablo T

Abstract

In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments. Copyright 1992 by Oxford University Press.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 30 (1992)
Issue (Month): 3 (July)
Pages: 418-36

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Handle: RePEc:oup:ecinqu:v:30:y:1992:i:3:p:418-36

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Cited by:
  1. Inderst, Roman & Wey, Christian, 2002. "Buyer Power and Supplier Incentives," CEPR Discussion Papers 3547, C.E.P.R. Discussion Papers.
  2. David Mills, 2013. "Countervailing Power and Chain Stores," Review of Industrial Organization, Springer, vol. 42(3), pages 281-295, May.
  3. Hans Normann, Bradley Ruffle and Christopher Snyder, 2004. "Do Buyer-Size Discounts Depend on the Curvature of the Surplus Function? Experimental Tests of Bargaining Models," Royal Holloway, University of London: Discussion Papers in Economics 04/01, Department of Economics, Royal Holloway University of London, revised Apr 2004.
  4. Andrew Kleit, 2001. "Creating a Public Good to Fight Monopolization: The Formation of Broadcast Music, Inc," Review of Industrial Organization, Springer, vol. 19(2), pages 243-256, September.
  5. Pio Baake & Vanessa von Schlippenbach, 2010. "Quality Distortions in Vertical Relations," Discussion Papers of DIW Berlin 968, DIW Berlin, German Institute for Economic Research.
  6. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
  7. von Schlippenbach, Vanessa & Teichmann, Isabel, 2012. "The strategic use of private quality standards in food supply chains," DICE Discussion Papers 62, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  8. Degryse, H.A. & Ongena, S., 2002. "Bank-firm relationships and international banking markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-92220, Tilburg University.
  9. Alderighi, Marco, 2007. "The role of buying consortia among SMEs in the electricity market in Italy," Energy Policy, Elsevier, vol. 35(6), pages 3463-3472, June.

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