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Buyer Power and Quality Improvement

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  • Pierpaolo Battigalli
  • Chiara Fumagalli
  • Michele Polo

Abstract

This paper analyses the sources of buyer power and its effect on sellers' investment. We show that a retailer extracts a larger surplus from the negotiation with an upstream manufacturer the more it is essential to the creation of total surplus. In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when the retail market is more fragmented, when the retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus a¤ects also the incentives of producers to invest in product quality, an instance of the hold up problem. This not only makes both the supplier and consumers worse o¤, but it may harm also the retailers.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 310.

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Date of creation: 2006
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Handle: RePEc:igi:igierp:310

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Citations

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Cited by:
  1. Pierpaolo Battigalli & Chiara Fumagalli & Michele Polo, 2006. "Buyer Power and Quality Improvement," Working Papers 310, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Özlem Bedre-Defolie & Stéphane Caprice, 2011. "Merger efficiency and welfare implications of buyer power," ESMT Research Working Papers ESMT-11-07, ESMT European School of Management and Technology.
  3. 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, European Association of Agricultural Economists 116079, European Association of Agricultural Economists.
  4. Miklos-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2008. "Buyer Power and Intraband Coordination," IDEI Working Papers 500, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Stephane Caprice & Vanessa von Schlippenbach, 2008. "Competition policy in a concentrated and globalized retail industry," Working Papers 23775, Institut National de la Recherche Agronomique, France.
  6. Eliana Viviano & Luciana Aimone Gigio & Emanuela Ciapanna & Daniele Coin & Fabrizio Colonna & Federica Lagna & Raffaele Santioni, 2012. "The retail trade sector and the food industry in Italy," Questioni di Economia e Finanza (Occasional Papers) 119, Bank of Italy, Economic Research and International Relations Area.
  7. Pio Baake & Vanessa von Schlippenbach, 2010. "Quality Distortions in Vertical Relations," Discussion Papers of DIW Berlin 968, DIW Berlin, German Institute for Economic Research.
  8. Johansen, Bjørn Olav, 2012. "The Buyer Power Of Multiproduct Retailers: Competition With One-Stop Shopping," Working Papers in Economics 03/12, University of Bergen, Department of Economics.
  9. E. Bacchiega & O. Bonroy, 2012. "Vertical relations and number of channels in quality-differentiated markets," Working Papers wp823, Dipartimento Scienze Economiche, Universita' di Bologna.

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