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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. Vanessa von Schlippenbach & Isabel Teichmann, 2012. "The Strategic Use of Private Quality Standards in Food Supply Chains," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 94(5), pages 1189-1201.
  2. Stephane Caprice & Vanessa von Schlippenbach, 2008. "Competition policy in a concentrated and globalized retail industry," Working Papers, Institut National de la Recherche Agronomique, France 23775, Institut National de la Recherche Agronomique, France.
  3. Miklos-Thal, Jeanine & Rey, Patrick & Vergé, Thibaud, 2008. "Buyer Power and Intraband Coordination," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 500, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Pio Baake & Vanessa Schlippenbach, 2011. "Quality distortions in vertical relations," Journal of Economics, Springer, Springer, vol. 103(2), pages 149-169, June.
  5. 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), Bank of Italy, Economic Research and International Relations Area 119, Bank of Italy, Economic Research and International Relations Area.
  6. E. Bacchiega & O. Bonroy, 2012. "Vertical relations and number of channels in quality-differentiated markets," Working Papers wp823, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Battigalli, Pierpaolo & Fumagalli, Chiara & Polo, Michele, 2007. "Buyer power and quality improvements," Research in Economics, Elsevier, Elsevier, vol. 61(2), pages 45-61, June.
  8. Johansen, Bjørn Olav, 2012. "The Buyer Power Of Multiproduct Retailers: Competition With One-Stop Shopping," Working Papers in Economics, University of Bergen, Department of Economics 03/12, University of Bergen, Department of Economics.
  9. Özlem Bedre-Defolie & Stéphane Caprice, 2011. "Merger Efficiency and Welfare Implications of Buyer Power," Discussion Papers of DIW Berlin 1144, DIW Berlin, German Institute for Economic Research.

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