Upstream Competition and Downstream Buyer Power
It is often claimed that large buyers wield buyer power.� Existing theories of this effect generally assume upstream monopoly.� Yet the evidence is strongest with upstream competition.� We show that upstream competition can yield buyer power for large buyers by generating supplier-level volume uncertainty - a feature that emerges from case study evidence of upstream competition - so the negotiated price depends on the seller's cost expectation.� By analyzing the effect of market structure changes on seller cost expectations the paper gives insights on three key policy-relevant questions around buyer power: (i) who wields it and under what circumstances (ii) does a downstream merger alter the buyer power of other buyers (so-called waterbed effects); and (iii) how are the incentives to invest in upstream technology altered by the creation of large downstream firms?
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