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Dominant Retailers and the Countervailing Power Hypothesis

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Abstract

The growing dominance of powerful big-box retailers in recent years has enhanced the interests in Galbraith's (1952) hypothesis of countervailing power. The objective of this paper is to assess rigorously this hypothesis using a theoretical model that captures the main ingredients of Galbraith's arguments as well as some of the important features of retail industry. It is demonstrated that consistent with the hypothesis an increase in the amount of countervailing power possessed by a dominant retailer can indeed lead to a fall in retail price for consumers. But this fall in retail price is not the result of a benevolent retailer acting on behalf of consumers but of a self-interested supplier trying to offset the reduction in profits caused by the rise in countervailing power. Total surplus does not always increase with the rise of countervailing power because of the possible efficiency loss on production side. Furthermore, the presence of fringe competition is crucial for countervailing power to benefit consumers and that there is a limit to how far a dominant retailer will go in its pursuit of countervailing power. The analysis in this paper, therefore, does not support the contention that countervailing power can replace competition as the regulatory mechanism of the economy.

Suggested Citation

  • Zhiqi Chen, 2001. "Dominant Retailers and the Countervailing Power Hypothesis," Carleton Economic Papers 01-05, Carleton University, Department of Economics, revised 2003.
  • Handle: RePEc:car:carecp:01-05
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    File URL: http://www1.carleton.ca/economics/research/working-papers/carleton-economic-papers-cep-2001-2010/
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    Keywords

    countervailing power; buyer power; dominant firm;

    JEL classification:

    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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