Buyer Power through Producer's Differentiation
This paper shows that a retailer may choose to differentiate his supplying producer from his rival's, at the expense of a downgrading in the quality of the product he offers to consumers, not to relax downstream competition, but to improve his buyer power in the negotiation with his producer. We consider a simple vertical industry where two producers sell products differentiated in quality to two retailers who operate in separated markets. In the game, retailers first choose which product to stock, then each retailer and her chosen producer bargain, where this pairwise bargaining happens sequentially, over the terms of a two-part tariff contract. Finally, retailers choose the quantities. We show that when upstream production costs are convex, the share of the total profits going to the retailer is higher if the latter choose to differentiate. We also are able to isolate the wish to differentiate as "only" due to increasing buyer power: namely that, via producers' differentiation, the retailer gets a larger share of smaller total profits. We show that this result also holds when retailers do not commit ex-ante on which product they stock and, in fact, we show that product differentiation to increase buyer power is even more likely in this case. We also derive the consequences of a differentiation induced by buyer power motives for consumer surplus and welfare, and extend our results for the case of downstream competition.
|Date of creation:||09 Sep 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (510) 642-3345
Fax: (510) 643-8911
Web page: http://www.escholarship.org/repec/are_ucb/
More information through EDIRC
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.:
- Avenel, E. & Caprice, S., 2006. "Upstream market power and product line differentiation in retailing," International Journal of Industrial Organization, Elsevier, vol. 24(2), pages 319-334, March.
- Patrick Rey & Thibaud Verge, 2002.
"Bilateral Control with Vertical Contracts,"
The Centre for Market and Public Organisation
02/048, Department of Economics, University of Bristol, UK.
- Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
- McAfee, R Preston & Schwartz, Marius, 1994. "Opportunism in Multilateral Vertical Contracting: Nondiscrimination, Exclusivity, and Uniformity," American Economic Review, American Economic Association, vol. 84(1), pages 210-30, March.
- Daniel P. O'Brien & Greg Shaffer, 1992. "Vertical Control with Bilateral Contracts," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 299-308, Autumn.
- Gilles Chemla, 2003. "Downstream Competition, Foreclosure, and Vertical Integration," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(2), pages 261-289, 06.
- Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-65, March.
- Catherine C. de Fontenay & Joshua S. Gans, 2004.
"Vertical Integration in the Presence of Upstream Competition,"
Department of Economics - Working Papers Series
904, The University of Melbourne.
- Catherine C. de Fontenay & Joshua S. Gans, 2005. "Vertical Integration in the Presence of Upstream Competition," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 544-572, Autumn.
- Joshua Gans & Catherine de Fontenay, 2004. "Vertical Integration in the Presence of Upstream Competition," Econometric Society 2004 North American Winter Meetings 7, Econometric Society.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Tasneem Chipty & Christopher M. Snyder, 1999. "The Role Of Firm Size In Bilateral Bargaining: A Study Of The Cable Television Industry," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 326-340, May.
- Howard Smith & John Thanassoulis, 2009.
"Upstream Competition and Downstream Buyer Power,"
Economics Series Working Papers
420, University of Oxford, Department of Economics.
- Chemla, Gilles, 2003. "Downstream Competition, Foreclosure, and Vertical Integration," Economics Papers from University Paris Dauphine 123456789/6313, Paris Dauphine University.
- Zhiqi Chen, 2004. "Monopoly and Product Diversity: The Role of Retailer Countervailing Power," Carleton Economic Papers 04-19, Carleton University, Department of Economics.
- Chemla, G., 1999.
"Downstream Competition, Foreclosure, and Vertical Integration,"
99-18, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
- G. Chemla, 1999. "Downstream competition, foreclosure, and vertical integration," THEMA Working Papers 99-18, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:cdl:agrebk:qt7b93w47c. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff)
If references are entirely missing, you can add them using this form.