How Strong Buyers Spur Upstream Innovation

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How Strong Buyers Spur Upstream Innovation

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Inderst, Roman
Wey, Christian

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Christian Wey

Abstract

We challenge the view that the presence of powerful buyers stifles suppliers' incentives to innovate. Following Katz (1987), we model buyer power as buyers' ability to substitute away from a given supplier and isolate several effects that support the opposite view, namely that the presence of powerful buyers induces a supplier to invest more in cost reduction. In contrast to negotiations with smaller buyers, the outcome of negotiations with large buyers is fully determined by their more valuable alternative supply option. This increases the supplier's incentives to reduce marginal costs, both as the supplier receives a larger fraction of the thereby generated incremental profits and as this makes buyers' alternative supply option less valuable. The latter effect is due to downstream competition between buyers and, as we show, is also stronger the larger and thus the more powerful buyers are.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5365.

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Date of creation: Nov 2005
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Handle: RePEc:cpr:ceprdp:5365

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Paper
- Roman Inderst & Christian Wey, 2005. "How Strong Buyers Spur Upstream Innovation," Discussion Papers of DIW Berlin 524, DIW Berlin, German Institute for Economic Research. [Downloadable!]

Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-01-24 (All new papers)
NEP-COM-2006-01-24 (Industrial Competition)
NEP-MIC-2006-01-24 (Microeconomics)

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Venturini, Luciano, 2006. "Vertical competition between manufacturers and retailers and upstream incentives to innovate and differentiate," 98th Seminar, June 29-July 2, 2006, Chania, Crete, Greece 10050, European Association of Agricultural Economists. [Downloadable!]
Battigalli, Pierpaulo & Fumagalli, Chiara & Polo, Michele, 2006. "Buyer Power and Quality Improvements," CEPR Discussion Papers 5814, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Pierpaolo Battigalli & Chiara Fumagalli & Michele Polo, 2006. "Buyer Power and Quality Improvement," Working Papers 310, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
- Battigalli, Pierpaolo & Fumagalli, Chiara & Polo, Michele, 2007. "Buyer power and quality improvements," Research in Economics, Elsevier, vol. 61(2), pages 45-61, June. [Downloadable!] (restricted)
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!]
Other versions:
- Chiara Fumagalli & Massimo Motta, 2008. "Buyers' Miscoordination, Entry and Downstream Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1196-1222, 08. [Downloadable!] (restricted)

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