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Buyer's Strategies, Entry Barriers, and Competition


  • Scheffman, David T
  • Spiller, Pablo T


In markets where sellers have customer-specific investments, and buyers can make credible, but costly, commitments to switch suppliers, buyers' strategies attenuate the market power of sellers. Furthermore, since current prices and a buyer's decision to switch suppliers are related, limit pricing becomes an equilibrium. Limit prices increase with the time it takes a buyer to switch suppliers and with buyers' switching costs, but fall with the level of sunk investments. Thus, sunk investments may restrain the sellers' ability to exert market power. The paper questions, then, the standard inverse relationship between market performance and sunk investments. Copyright 1992 by Oxford University Press.

Suggested Citation

  • Scheffman, David T & Spiller, Pablo T, 1992. "Buyer's Strategies, Entry Barriers, and Competition," Economic Inquiry, Western Economic Association International, vol. 30(3), pages 418-436, July.
  • Handle: RePEc:oup:ecinqu:v:30:y:1992:i:3:p:418-36

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    References listed on IDEAS

    1. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
    2. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    3. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    4. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    5. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    6. Allen, Bruce T, 1971. "Vertical Integration and Market Foreclosure: The Case of Cement and Concrete," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 251-274, April.
    7. Dodd, Peter, 1980. "Merger proposals, management discretion and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 8(2), pages 105-137, June.
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    Cited by:

    1. Andrew Kleit, 2001. "Creating a Public Good to Fight Monopolization: The Formation of Broadcast Music, Inc," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 19(2), pages 243-256, September.
    2. Inderst, Roman & Wey, Christian, 2007. "Buyer power and supplier incentives," European Economic Review, Elsevier, vol. 51(3), pages 647-667, April.
    3. Hans-Theo Normann & Bradley J. Ruffle & Christopher M. Snyder, 2007. "Do buyer-size discounts depend on the curvature of the surplus function? Experimental tests of bargaining models," RAND Journal of Economics, RAND Corporation, vol. 38(3), pages 747-767, September.
    4. Pio Baake & Vanessa Schlippenbach, 2011. "Quality distortions in vertical relations," Journal of Economics, Springer, vol. 103(2), pages 149-169, June.
    5. Rickert, Dennis & Schain, Jan Philip & Stiebale, Joel, 2018. "Local market structure and consumer prices: Evidence from a retail merger," DICE Discussion Papers 280, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Nestor Duch-Brown, 2017. "Platforms to business relations in online platform ecosystems," JRC Working Papers on Digital Economy 2017-07, Joint Research Centre (Seville site).
    7. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    8. 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, vol. 94(5), pages 1189-1201.
    9. Stéphane Caprice & Patrick Rey, 2015. "Buyer Power from Joint Listing Decision," Economic Journal, Royal Economic Society, vol. 125(589), pages 1677-1704, December.
    10. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
    11. David Mills, 2013. "Countervailing Power and Chain Stores," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 42(3), pages 281-295, May.
    12. Alderighi, Marco, 2007. "The role of buying consortia among SMEs in the electricity market in Italy," Energy Policy, Elsevier, vol. 35(6), pages 3463-3472, June.

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