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Downstream Competition and the Effects of Buyer Power

Author

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  • Zhiqi Chen

    (Department of Economics, Carleton University, Ottawa, ON)

  • Hong Ding

    (Department of Economics, University of Ottawa, Ottawa, ON)

Abstract

To examine the interaction between buyer power and competition intensity in a downstream market, we construct a model in which oligopolistic retailers compete in quantity in the downstream market and one of them is a large retailer that has its own exclusive supplier. We demonstrate that an increase in the buyer power of the large retailer against its supplier leads to a fall in retail price and consequently an improvement in consumer surplus, and this is true even in the extreme case where the large retailer is a monopoly in the downstream market. More interestingly, we find that the beneficial effects of an increase in buyer power are large when the intensity of downstream competition is low, with the effects being the largest in the case of downstream monopoly. Our findings suggest that the traditional approach to merger reviews, under which an antitrust agency focuses primarily on maintaining competition in local retail markets, can work reasonably well even in a situation where the merger enhances the buyer power of the merged entity.

Suggested Citation

  • Zhiqi Chen & Hong Ding, 2013. "Downstream Competition and the Effects of Buyer Power," Working Papers E1308E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:e1308e
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    Cited by:

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    2. Aditya Bhattacharjea & Srishti Gupta, 2022. "Alternative Forms of Buyer Power in a Vertical Duopoly: Implications for profits and consumer welfare," Working papers 326, Centre for Development Economics, Delhi School of Economics.
    3. Noriaki Matsushima & Shohei Yoshida, 2018. "The Countervailing Power Hypothesis when Dominant Retailers Function as Sales Promoters," Manchester School, University of Manchester, vol. 86(5), pages 665-680, September.
    4. Aditya Bhattacharjea & Srishti Gupta, 2024. "Alternative forms of buyer power in a vertical duopoly: implications for profits, welfare, and cost pass-through," Journal of Economics, Springer, vol. 142(2), pages 163-198, July.
    5. Patrice Bougette & Oliver Budzinski & Frédéric Marty, 2019. "Exploitative Abuse and Abuse of Economic Dependence: What Can We Learn From an Industrial Organization Approach?," Revue d'économie politique, Dalloz, vol. 129(2), pages 261-286.
    6. Nejat Anbarci & Kang Rong & Jaideep Roy, 2019. "Random-settlement arbitration and the generalized Nash solution: one-shot and infinite-horizon cases," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 21-52, July.
    7. Qiu Zhao, 2019. "The Influence of Buyer Power on Supply Chain Pricing with Downstream Competition," Sustainability, MDPI, vol. 11(10), pages 1-19, May.

    More about this item

    Keywords

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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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