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Buyer power through producer's differentiation

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Author Info

  • Chambolle, Claire
  • Villas-Boas, Sofia B

    ()
    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

Abstract

This paper shows that a retailer may choose to differentiate his supplying producer from his rival's, at the expense of a downgrading in the quality of the product he offers to consumers, not to relax downstream competition, but to improve his buyer power in the negotiation with his producer. We consider a simple vertical industry where two producers sell products differentiated in quality to two retailers who operate in separated markets. In the game, retailers first choose which product to stock, then each retailer and her chosen producer bargain, where this pairwise bargaining happens sequentially, over the terms of a two-part tariff contract. Finally, retailers choose the quantities. We show that when upstream production costs are convex, the share of the total profits going to the retailer is higher if the latter choose to differentiate. We also are able to isolate the wish to differentiate as "only" due to increasing buyer power: namely that, via producers' differentiation, the retailer gets a larger share of smaller total profits. We show that this result also holds when retailers do not commit ex-ante on which product they stock and, in fact, we show that product differentiation to increase buyer power is even more likely in this case. We also derive the consequences of a differentiation induced by buyer power motives for consumer surplus and welfare, and extend our results for the case of downstream competition.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1042.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:are:cudare:1042

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Related research

Keywords: buyer power; sequential bargaining; product differentiation; vertical relationships;

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References

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  1. McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
  2. Joshua Gans & Catherine de Fontenay, 2004. "Vertical Integration in the Presence of Upstream Competition," Econometric Society 2004 North American Winter Meetings 7, Econometric Society.
  3. Rey, Patrick & Vergé, Thibaud, 2003. "Bilateral Control with Vertical Contracts," IDEI Working Papers 202, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
  5. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  6. Smith, Howard & Thanassoulis, John, 2006. "Upstream Competition and Downstream Buyer Power," CEPR Discussion Papers 5803, C.E.P.R. Discussion Papers.
  7. G. Chemla, 1999. "Downstream competition, foreclosure, and vertical integration," THEMA Working Papers 99-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Zhiqi Chen, 2004. "Monopoly and Product Diversity: The Role of Retailer Countervailing Power," Carleton Economic Papers 04-19, Carleton University, Department of Economics.
  10. Chemla, Gilles, 2003. "Downstream Competition, Foreclosure, and Vertical Integration," Economics Papers from University Paris Dauphine 123456789/6313, Paris Dauphine University.
  11. Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
  12. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
  13. Avenel, E. & Caprice, S., 2006. "Upstream market power and product line differentiation in retailing," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 319-334, March.
  14. Gilles Chemla, 2003. "Downstream Competition, Foreclosure, and Vertical Integration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(2), pages 261-289, 06.
  15. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
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Cited by:
  1. Teichmann, Isabel & von Schlippenbach, Vanessa, 2011. "The Strategic Use of Private Quality Standards in Food Supply Chains," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 116079, European Association of Agricultural Economists.
  2. Draganska, Michaela & Klapper, Daniel & Villas-Boas, Sofia B., 2008. "A larger slice or a larger pie? : an empirical investigation of bargaining power in the distribution channel," CUDARE Working Paper Series 1046, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.

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