How Strong Buyers Spur Upstream Innovation
AbstractWe challenge the view that the presence of powerful buyers stiffles 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 524.
Length: 36 p.
Date of creation: 2005
Date of revision:
Publication status: Published in: Journal of the European Economic Association 9 (2011), 4, 702-720
Buyer power; Merger; Investment incentives;
Other versions of this item:
- 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:
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.:
- Sofia Berto Villas-Boas, 2007.
"Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data,"
Review of Economic Studies,
Oxford University Press, vol. 74(2), pages 625-652.
- Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
- Villas-Boas, Sofia B., 2007. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
252, David K. Levine.
- Zhiqi Chen, 2001.
"Dominant Retailers and the Countervailing Power Hypothesis,"
Carleton Economic Papers
01-05, Carleton University, Department of Economics, revised 2003.
- Chen, Zhiqi, 2003. " Dominant Retailers and the Countervailing-Power Hypothesis," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 612-25, Winter.
- David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
- Bonnet, Celine & Dubois, Pierre & Simioni, Michel, 2006.
"Two-Part Tariffs versus Linear Pricing Between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets,"
2006 Annual Meeting, August 12-18, 2006, Queensland, Australia
25685, International Association of Agricultural Economists.
- Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2006. "Two-Part Tariffs versus Linear Pricing Between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," CEPR Discussion Papers 6016, C.E.P.R. Discussion Papers.
- Bonnet, C. & Dubois, P. & Simioni, M., 2006. "Two-part tariffs versus linear pricing between manufacturers and retailers : empirical tests on differentiated products markets," Economics Working Paper Archive (Toulouse) 200604, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).
- Bonnet, Céline & Dubois, Pierre & Simioni, Michel, 2004. "Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets," IDEI Working Papers 370, Institut d'Économie Industrielle (IDEI), Toulouse, revised Apr 2006.
- O'Brien, Daniel P & Shaffer, Greg, 1994. "The Welfare Effects of Forbidding Discriminatory Discounts: A Secondary Line Analysis of Robinson-Patman," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 296-318, October.
- Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
- Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
- Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-67, March.
- Zhiqi Chen, 2004. "Countervailing Power and Product Diversity," Econometric Society 2004 North American Winter Meetings 279, Econometric Society.
- Qiu, Larry D., 1997. "On the Dynamic Efficiency of Bertrand and Cournot Equilibria," Journal of Economic Theory, Elsevier, vol. 75(1), pages 213-229, July.
- Horn, H. & Wolinsky, A., 1988.
"Bilateral Monopolies And Incentives For Merger,"
410, Stockholm - International Economic Studies.
- Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
- Suchan Chae & Paul Heidhues, 2004.
"Buyers' Alliances for Bargaining Power,"
Journal of Economics & Management Strategy,
Wiley Blackwell, vol. 13(4), pages 731-754, December.
- 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.
- Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
- 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.
- Schmidt, Klaus M, 1997.
"Managerial Incentives and Product Market Competition,"
Review of Economic Studies,
Wiley Blackwell, vol. 64(2), pages 191-213, April.
- Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
- Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November.
- 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.
- Chiara Fumagalli & Massimo Motta, 2008.
"Buyers' Miscoordination, Entry and Downstream Competition,"
Royal Economic Society, vol. 118(531), pages 1196-1222, 08.
- 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.
- Battigalli, Pierpaulo & Fumagalli, Chiara & Polo, Michele, 2006.
"Buyer Power and Quality Improvements,"
CEPR Discussion Papers
5814, C.E.P.R. Discussion Papers.
- Marvel, Howard P. & Yang, Huanxing, 2008. "Group purchasing, nonlinear tariffs, and oligopoly," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1090-1105, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If references are entirely missing, you can add them using this form.