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Threat of Exit as a Source of Bargaining Power

  • Fabian Bergès
  • Claire Chambolle

This article analyzes a simple two-period model where two homogenous manufacturers compete to supply a monopolist retailer. We show that if manufacturers are vulnerable (i.e if they are likely to exit the market in case of insufficient orders in the first period), they may exploit their threat of exit to capture the whole first period industry profit. Indeed, the retailer will accept to pay the high price to the manufacturers in order to secure upstream competition in the second period. Results are robust under different market structures or contract types. JEL Classification – L14, D21, Q12.

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Article provided by De Boeck Université in its journal Recherches économiques de Louvain.

Volume (Year): 75 (2009)
Issue (Month): 3 ()
Pages: 353-368

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Handle: RePEc:cai:reldbu:rel_753_0353
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  1. Marie-Laure Allain, 1999. "The Balance of Power Between Producers and Retailers : A Differentiation Model," Working Papers 99-17, Centre de Recherche en Economie et Statistique.
  2. Biglaiser, Gary & DeGraba, Patrick, 2001. "Downstream Integration by a Bottleneck Input Supplier Whose Regulated Wholesale Prices Are Above Costs," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 302-15, Summer.
  3. Roman Inderst & Christian Wey, 2003. "Buyer Power and Supplier Incentives," CIG Working Papers SP II 2003-05, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  4. repec:tpr:qjecon:v:112:y:1997:i:3:p:663-91 is not listed on IDEAS
  5. Chambolle, Claire & Villas-Boas, Sofia B, 2007. "Buyer power through producer's differentiation," CUDARE Working Paper Series 1042, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  6. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Biglaiser, Gary & Vettas, Nikolaos, 2004. "Dynamic Price Competition with Capacity Constraints and Strategic Buyers," CEPR Discussion Papers 4315, C.E.P.R. Discussion Papers.
  8. Tracy R. Lewis & Huseyin Yildirim, 2002. "Managing Dynamic Competition," American Economic Review, American Economic Association, vol. 92(4), pages 779-797, September.
  9. Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
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