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Buyer Power and the “Waterbed Effect”

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  • Roman Inderst

    ()
    (University of Frankfurt)

  • Tommaso M. Valletti

    ()
    (University of Rome "Tor Vergata")

Abstract

We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the “waterbed effect”). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified “waterbed effect” holds irrespective of whether a firm grows by acquisition or “organically” by becoming more efficient.

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File URL: ftp://www.ceistorvergata.it/repec/rpaper/RP107.pdf
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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 107.

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Length: 27 pages
Date of creation: 10 Jul 2008
Date of revision: 10 Jul 2008
Handle: RePEc:rtv:ceisrp:107

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Web page: http://www.ceistorvergata.it
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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References

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  1. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
  2. 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.
  3. Mathewson, Frank & Winter, Ralph A., 1997. "Buyer groups," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 137-164, April.
    • G. Frank Mathewson & Ralph A. Winter, 1995. "Buyer Groups," Working Papers rwinter-96-01, University of Toronto, Department of Economics.
  4. Emmanuel Petrakis & Chrysovalantou Miliou & Nikos Vettas, 2009. "(In)efficient trading forms in competing vertical chains," Working Papers 0916, University of Crete, Department of Economics.
  5. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
  6. Zhiqi Chen, 2004. "Countervailing Power and Product Diversity," Econometric Society 2004 North American Winter Meetings 279, Econometric Society.
  7. Inderst, Roman & Wey, Christian, 2001. "Bargaining, Mergers and Technology Choice in Bilaterally Oligopolistic Industries," CEPR Discussion Papers 2981, C.E.P.R. Discussion Papers.
  8. Gans, Joshua S. & King, Stephen P., 2002. "Exclusionary contracts and competition for large buyers," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1363-1381, November.
  9. João VIEIRA-MONTEZ, 2004. "Downstream Concentration and Producer's Capacity Choice," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.13, Université de Lausanne, Faculté des HEC, DEEP.
  10. Zhiqi Chen, 2001. "Dominant Retailers and the Countervailing Power Hypothesis," Carleton Economic Papers 01-05, Carleton University, Department of Economics, revised 2003.
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Citations

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Cited by:
  1. Vanessa von Schlippenbach, 2008. "Complementarities, Below-Cost Pricing, and Welfare Losses," Discussion Papers of DIW Berlin 788, DIW Berlin, German Institute for Economic Research.
  2. Marie-Laure Allain & Claire Chambolle & Stéphane Turolla & Sofia B. Villas-Boas, 2013. "The Impact of Retail Mergers on Food Prices : Evidence from France," Working Papers 2013-18, Centre de Recherche en Economie et Statistique.
  3. Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," TSE Working Papers 10-218, Toulouse School of Economics (TSE), revised Dec 2011.
  4. von Schlippenbach, Vanessa & Wey, Christian, 2011. "One-stop shopping behavior, buyer power, and upstream merger incentives," DICE Discussion Papers 27, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  5. 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.
  6. Boone, J. & Douven, R.C.M.H. & Droge, C. & Mosca, I., 2010. "Health Insurance Competition: The Effect of Group Contracts," Discussion Paper 2010-55, Tilburg University, Center for Economic Research.
  7. Noriaki Matsushima & Laixun Zhao, 2010. "Multimarket linkages, buyer power, and the productivity puzzle," ISER Discussion Paper 0797, Institute of Social and Economic Research, Osaka University.
  8. Smith, Howard & Thanassoulis, John, 2012. "Upstream uncertainty and countervailing power," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 483-495.
  9. Roman Inderst & Christian Wey, 2008. "Die Wettbewerbsanalyse von Nachfragemacht aus verhandlungstheoretischer Sicht," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(4), pages 465-485, November.
  10. Heimeshoff, Ulrich & Klein, Gordon J., 2013. "Bargaining power and local heroes," DICE Discussion Papers 87, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  11. Chris Doyle & Martijn A. Han, 2012. "Cartelization Through Buyer Groups," SFB 649 Discussion Papers SFB649DP2012-059, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  12. Normann, Hans-Theo, 2009. "Vertical integration, raising rivals' costs and upstream collusion," European Economic Review, Elsevier, vol. 53(4), pages 461-480, May.
  13. Fabian Herweg & Daniel Müller, 2012. "Price Discrimination in Input Markets: Downstream Entry and Efficiency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(3), pages 773-799, 09.

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