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A Dynamic Theory of Countervailing Power

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  • Christopher M. Snyder

Abstract

In this article I develop a model of an infinitely repeated procurement auction with one buyer and several sellers. The buyer can accumulate a backlog of unfilled orders which, similar to a boom in demand, forces the sellers t o collude on a low price to prevent undercutting. If the buyer's cost of shifting its consumption over time is low enough, then the extent of collusion is bounded away from the joint-profit-maximizing level even for discount factors approaching one. The model is extended to allow for multiple buyers. Large buyers are shown to obtain lower prices from the sellers. Buyer mergers increase profit for all buyers, not just the merging pair, at the expense of the sellers. In contrast, buyer growth through addition harms buyers that do not grow and benefits sellers.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 27 (1996)
Issue (Month): 4 (Winter)
Pages: 747-769

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Handle: RePEc:rje:randje:v:27:y:1996:i:winter:p:747-769

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Cited by:
  1. Jim Engle-Warnick & Bradley J Ruffle, 2002. "Buyer Countervailing Power versus Monopoly Power: Evidence from Experimental Posted-Offer Markets," Economics Series Working Papers 2002-W14, University of Oxford, Department of Economics.
  2. Stephane Caprice & Vanessa von Schlippenbach, 2008. "Competition policy in a concentrated and globalized retail industry," Working Papers 23775, Institut National de la Recherche Agronomique, France.
  3. Normann, Hans-Theo & Rösch, Jürgen & Schultz, Luis Manuel, 2012. "Do buyer groups facilitate collusion?," DICE Discussion Papers 74, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  4. Louis Kaplow & Carl Shapiro, 2007. "Antitrust," NBER Working Papers 12867, National Bureau of Economic Research, Inc.
  5. Walter Beckert, 2011. "Empirical Analysis of Countervailing Power in Business-to-Business Bargaining," Birkbeck Working Papers in Economics and Finance 1107, Birkbeck, Department of Economics, Mathematics & Statistics.
  6. Anders Liljenberg, 2005. "The Austrian Tertius Gaudens: A Revisit of Competition Theory in Light of Georg Simmel," The Review of Austrian Economics, Springer, vol. 18(2), pages 195-218, June.
  7. DeGraba, Patrick, 2006. "The loss leader is a turkey: Targeted discounts from multi-product competitors," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 613-628, May.
  8. Bradley J. Ruffle, 2009. "When Do Large Buyers Pay Less? Experimental Evidence," Working Papers 0910, Ben-Gurion University of the Negev, Department of Economics.
  9. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation 12/282, Department of Economics, University of Bristol, UK.
  10. Ilya Segal, 2000. "Collusion, Exclusion, and Inclusion in Random-Order Bargaining," Econometric Society World Congress 2000 Contributed Papers 0738, Econometric Society.
  11. Baldursson, Fridrik M. & Johannesson, Sigurdur, 2005. "Kaupendamáttur á sementsmarkaði
    [Buyer power in the cement industry]
    ," MPRA Paper 14742, University Library of Munich, Germany.

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