Countervailing power and input pricing: When is a waterbed effect likely?
AbstractA downstream firm with countervailing power can extract a reduced price from an input supplier. A waterbed effect occurs if this price reduction leads the input supplier to raise the price that it charges another downstream firm. Policy makers have been concerned that this waterbed effect could undermine downstream competition, and it was considered in detail in the 2008 UK grocery inquiry. This paper presents a simple but parsimonious model to investigate if and when a waterbed effect may arise. It shows that the effect may arise through optimal pricing behaviour, but that this critically depends on the nature of upstream technology, downstream competition and consumer demand. In particular, downstream competition tends to work against a waterbed effect, but convex upstream costs support the effect. The analysis is complementary to recent academic work on the waterbed effect that focuses on bargaining constraints.
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Bibliographic InfoPaper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 27-12.
Length: 23 pages
Date of creation: Sep 2012
Date of revision:
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Postal: Department of Economics, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/eco/
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Other versions of this item:
- Stephen P. King, 2013. "Countervailing Power and Input Pricing: When is a Waterbed Effect Likely?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(3), pages 325-340, November.
- NEP-ALL-2012-09-30 (All new papers)
- NEP-BEC-2012-09-30 (Business Economics)
- NEP-COM-2012-09-30 (Industrial Competition)
- NEP-IPR-2012-09-30 (Intellectual Property Rights)
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.:
- Inderst, Roman & Wey, Christian, 2002.
"Buyer Power and Supplier Incentives,"
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RAND Journal of Economics,
The RAND Corporation, vol. 34(1), pages 1-19, Spring.
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- Inderst, Roman & Wey, Christian, 2001. "Bargaining, Mergers and Technology Choice in Bilaterally Oligopolistic Industries," CEPR Discussion Papers 2981, C.E.P.R. Discussion Papers.
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