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Buyer Power and Quality Improvement

Author

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  • Pierpaolo Battigalli
  • Chiara Fumagalli
  • Michele Polo

Abstract

This paper analyses the sources of buyer power and its effect on sellers' investment. We show that a retailer extracts a larger surplus from the negotiation with an upstream manufacturer the more it is essential to the creation of total surplus. In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when the retail market is more fragmented, when the retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus a¤ects also the incentives of producers to invest in product quality, an instance of the hold up problem. This not only makes both the supplier and consumers worse o¤, but it may harm also the retailers.

Suggested Citation

  • Pierpaolo Battigalli & Chiara Fumagalli & Michele Polo, 2006. "Buyer Power and Quality Improvement," Working Papers 310, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:310
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Inderst, Roman & Jakubovic, Zlata & Jovanovic, Dragan, 2015. "Buyer Power and Functional Competition for Innovation," MPRA Paper 61214, University Library of Munich, Germany.
    2. Matsushima, Noriaki & Shinohara, Ryusuke, 2014. "What factors determine the number of trading partners?," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 428-441.
    3. Battigalli, Pierpaolo & Fumagalli, Chiara & Polo, Michele, 2007. "Buyer power and quality improvements," Research in Economics, Elsevier, vol. 61(2), pages 45-61, June.
    4. Pio Baake & Vanessa Schlippenbach, 2011. "Quality distortions in vertical relations," Journal of Economics, Springer, vol. 103(2), pages 149-169, June.
    5. repec:bla:manchs:v:85:y:2017:i:5:p:511-540 is not listed on IDEAS
    6. Zhiqi Chen & Hong Ding & Zhiyang Liu, 2016. "Downstream Competition and the Effects of Buyer Power," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(1), pages 1-23, August.
    7. Özlem Bedre-Defolie & Stéphane Caprice, 2011. "Merger efficiency and welfare implications of buyer power," ESMT Research Working Papers ESMT-11-07, ESMT European School of Management and Technology.
    8. E. Bacchiega & O. Bonroy, 2012. "Vertical relations and number of channels in quality-differentiated markets," Working Papers wp823, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. 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.
    10. Mérel, Pierre & Sexton, Richard J., 2017. "Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?," International Journal of Industrial Organization, Elsevier, vol. 50(C), pages 259-293.
    11. Eliana Viviano & Luciana Aimone Gigio & Emanuela Ciapanna & Daniele Coin & Fabrizio Colonna & Federica Lagna & Raffaele Santioni, 2012. "The retail trade sector and the food industry in Italy," Questioni di Economia e Finanza (Occasional Papers) 119, Bank of Italy, Economic Research and International Relations Area.
    12. Inderst, Roman, 2007. "Leveraging buyer power," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 908-924, October.
    13. Johansen, Bjørn Olav, 2012. "The Buyer Power Of Multiproduct Retailers: Competition With One-Stop Shopping," Working Papers in Economics 03/12, University of Bergen, Department of Economics.
    14. Martin C. Schleper & Constantin Blome & David A. Wuttke, 2017. "The Dark Side of Buyer Power: Supplier Exploitation and the Role of Ethical Climates," Journal of Business Ethics, Springer, vol. 140(1), pages 97-114, January.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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