Recent contributions to the issue of countervailing power have formally demonstrated that imperfectly competitive market structures in retailing have different welfare implications from those hypothesized by Galbraith (1952) according to which increasing concentration in retailing may offer social benefits. Recent works in this area show that greater concentration at the retail level may afford retailers a simultaneous increase in both their buying and selling power. Whilst the former improves their relative bargaining position, the latter allows for increased price-cost margins. This recent literature suggests that retailing concentration may have a negative impact on consumer welfare since the effect of increased price-cost margins is sufficiently greater than the downward pressure on intermediate prices generated by increases in retailers' 'buying power'. As a result, greater concentration at the retail level may lead to higher final prices and lower social welfare. In this paper, we argue that the bargaining models of the manufacturer-retailer relationship used in these works take into account only partially the sources of retailers' bargaining power. In fact, they include only the source associated to the number of retailers. However, as indicated by a massive trade and applied literature, several factors determine the relative bargaining power of manufacturers and retailers. One crucial factor is given by the presence of vertical competition between manufacturers' brands and retailers' private labels. This form of competition represents a further source of bargaining power for retailers which may reinforce the buying power effect and imply conclusions more favorable to the countervailing power hypothesis. To explore this hypothesis, we develop a model which differs from previous ones by focusing on market settings where vertical competition affects the relative bargaining positions and bargaining outcomes. The paper examines the negotiation process between a manufacturer and N retailers on the transfer price as a Nash bargaining game and determines the outcome by the Nash bargaining solution. We assume that vertical competition decreases the profit levels and the disagreement payoff of the manufacturer. We also assume that vertical competition increases the disagreement payoff of retailers while their profits remain unchanged. It is shown that vertical competition increases retailers' bargaining power, reduces equilibrium transfer prices and hence equilibrium retail prices. In particular, our results show that final prices are lower when vertical competition is more intense for any given number of retailers. This means that the higher bargaining power associated to vertical competition plays a positive role for consumers when their interest is measured in terms of retail prices.
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Paper provided by University of Minnesota, Center for International Food and Agricultural Policy in its series Conference Papers with number
14489.
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