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Dominant Retailers and the Countervailing Power Hypothesis

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Author Info
Zhiqi Chen () (Department of Economics, Carleton University)

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Abstract

The growing dominance of powerful big-box retailers in recent years has enhanced the interests in Galbraith's (1952) hypothesis of countervailing power. The objective of this paper is to assess rigorously this hypothesis using a theoretical model that captures the main ingredients of Galbraith's arguments as well as some of the important features of retail industry. It is demonstrated that consistent with the hypothesis an increase in the amount of countervailing power possessed by a dominant retailer can indeed lead to a fall in retail price for consumers. But this fall in retail price is not the result of a benevolent retailer acting on behalf of consumers but of a self-interested supplier trying to offset the reduction in profits caused by the rise in countervailing power. Total surplus does not always increase with the rise of countervailing power because of the possible efficiency loss on production side. Furthermore, the presence of fringe competition is crucial for countervailing power to benefit consumers and that there is a limit to how far a dominant retailer will go in its pursuit of countervailing power. The analysis in this paper, therefore, does not support the contention that countervailing power can replace competition as the regulatory mechanism of the economy.

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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 01-05.

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Length: 34 pages
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Publication status: Published: Carleton Working Papers
Handle: RePEc:car:carecp:01-05

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Related research
Keywords: countervailing power; buyer power; dominant firm;

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Find related papers by JEL classification:
L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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  1. Inderst, Roman & Wey, Christian, 2005. "How Strong Buyers Spur Upstream Innovation," CEPR Discussion Papers 5365, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Baldursson, Fridrik M. & Johannesson, Sigurdur, 2005. "Kaupendamáttur á sementsmarkaði
    [Buyer power in the cement industry]    ," MPRA Paper 14742, University Library of Munich, Germany. [Downloadable!]
  3. Horst Raff & Nicolas Schmitt, 2009. "Buyer Power in International Markets," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  4. George Symeonidis, 2009. "Downstream merger and welfare in a bilateral oligopoly," Economics Discussion Papers 671, University of Essex, Department of Economics. [Downloadable!]
  5. Monterio, G.F.A. & Farina, E.M.M.Q. & Nunes, R., 2008. "Market Structure and Competition in Food Retail: Some Evidences from Brazil," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44199, European Association of Agricultural Economists. [Downloadable!]
  6. Battigalli, Pierpaulo & Fumagalli, Chiara & Polo, Michele, 2006. "Buyer Power and Quality Improvements," CEPR Discussion Papers 5814, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. George Symeonidis, 2007. "Downstream Competition, Bargaining and Welfare," Economics Discussion Papers 625, University of Essex, Department of Economics. [Downloadable!]
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  8. Roman Inderst & Tommaso M. Valletti, 2008. "Buyer Power and the “Waterbed Effect”," CEIS Research Paper 107, Tor Vergata University, CEIS, revised 10 Jul 2008. [Downloadable!]
  9. Chiara Fumagalli & Massimo Motta, 2006. "Buyers’ miscoordination, entry, and downstream competition," CSEF Working Papers 152, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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  10. Chrysovalantou Milliou & Emmanuel Petrakis, 2004. "Business-to-business electronic marketplaces: Joining a public or creating a private," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 99-112. [Downloadable!]
  11. Richard J. Volpe III & Nathalie Lavoie, 2006. "The Effect of Wal-Mart Supercenters on Grocery Prices in New England," Working Papers 2006-8, University of Massachusetts Amherst, Department of Resource Economics. [Downloadable!]
  12. Milliou, Chrysovalantou & Petrakis, Emmanuel & Vettas, Nikolaos, 2003. "Endogenous Contracts Under Bargaining in Competing Vertical Chains," CEPR Discussion Papers 3976, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  13. Suchan Chae & Paul Heidhues, 2003. "Buyers’ Alliances for Bargaining Power," CIG Working Papers SP II 2003-24, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
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