How Strong Buyers Spur Upstream Innovation
We challenge the view that the presence of powerful buyers stiffles suppliers' incentives to innovate. Following Katz (1987), we model buyer power as buyers' ability to substitute away from a given supplier and isolate several effects that support the opposite view, namely that the presence of powerful buyers induces a supplier to invest more in cost reduction. In contrast to negotiations with smaller buyers, the outcome of negotiations with large buyers is fully determined by their more valuable alternative supply option. This increases the supplier.s incentives to reduce marginal costs, both as the supplier receives a larger fraction of the thereby generated incremental profits and as this makes buyers' alternative supply option less valuable. The latter effect is due to downstream competition between buyers and, as we show, is also stronger the larger and thus the more powerful buyers are.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.diw.de/en
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.:
- Chen, Zhiqi, 2003.
" Dominant Retailers and the Countervailing-Power Hypothesis,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(4), pages 612-25, Winter.
- Zhiqi Chen, 2001. "Dominant Retailers and the Countervailing Power Hypothesis," Carleton Economic Papers 01-05, Carleton University, Department of Economics, revised 2003.
- Ariel Rubinstein, 2010.
"Perfect Equilibrium in a Bargaining Model,"
Levine's Working Paper Archive
661465000000000387, David K. Levine.
- O'Brien, Daniel P & Shaffer, Greg, 1994. "The Welfare Effects of Forbidding Discriminatory Discounts: A Secondary Line Analysis of Robinson-Patman," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 296-318, October.
- Zhiqi Chen, 2004. "Countervailing Power and Product Diversity," Econometric Society 2004 North American Winter Meetings 279, Econometric Society.
- Villas-Boas, Sofia B., 2007.
"Vertical relationships between manufacturers and retailers: inference with limited data,"
Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series
qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
- Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
- Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
- Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
- Shaked, Avner & Sutton, John, 1984. "Involuntary Unemployment as a Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 52(6), pages 1351-64, November.
- Qiu, Larry D., 1997. "On the Dynamic Efficiency of Bertrand and Cournot Equilibria," Journal of Economic Theory, Elsevier, vol. 75(1), pages 213-229, July.
- Schmidt, Klaus M., 1996.
"Managerial Incentives and Product Market Competition,"
CEPR Discussion Papers
1382, C.E.P.R. Discussion Papers.
- Schmidt, Klaus M, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 191-213, April.
- Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
- Suchan Chae & Paul Heidhues, 2003.
"Buyers’ Alliances for Bargaining Power,"
CIG Working Papers
SP II 2003-24, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- 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.
- Horn, H. & Wolinsky, A., 1988.
"Bilateral Monopolies And Incentives For Merger,"
410, Stockholm - International Economic Studies.
- Binmore, Ken & Shaked, Avner & Sutton, John, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 753-70, November.
- Haller, Hans & Holden, Steinar, 1990. "A letter to the editor on wage bargaining," Journal of Economic Theory, Elsevier, vol. 52(1), pages 232-236, October.
- Hardt, Michael, 1995. "Market foreclosure without vertical integration," Economics Letters, Elsevier, vol. 47(3-4), pages 423-429, March.
- Dobson, Paul W & Waterson, Michael, 1997. "Countervailing Power and Consumer Prices," Economic Journal, Royal Economic Society, vol. 107(441), pages 418-30, March.
- David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp524. 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: (Bibliothek)
If references are entirely missing, you can add them using this form.