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Upstream Competition and Downstream Buyer Power

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  • Howard Smith
  • John Thanassoulis

Abstract

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?

Suggested Citation

  • Howard Smith & John Thanassoulis, 2009. "Upstream Competition and Downstream Buyer Power," Economics Series Working Papers 420, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:420
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Marie-Laure Allain & Emeric Henry & Margaret Kyle, 2011. "Inefficiencies in the sale of ideas: theory and empirics," SciencePo Working papers Main hal-00639128, HAL.
    2. Kyle, Margaret & Allain, Marie-Laure, 2011. "Inefficiencies in technology transfer: theory and empirics," CEPR Discussion Papers 8206, C.E.P.R. Discussion Papers.
    3. Nestor Duch-Brown, 2017. "Platforms to business relations in online platform ecosystems," JRC Working Papers on Digital Economy 2017-07, Joint Research Centre.
    4. Walter Beckert, 2018. "An Empirical Analysis of Countervailing Power in Business-to-Business Bargaining," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 52(3), pages 369-402, May.
    5. Ioannis N. Pinopoulos, 2020. "Input Price Discrimination and Upstream R&D Investments," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(1), pages 85-106, August.
    6. Reisinger, Markus & Schnitzer, Monika E, 2008. "A Model of Vertical Oligopolistic Competition," Department of Economics, Working Paper Series qt3n9000fg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    7. Claire Chambolle & Sofia Villas-Boas, 2007. "Buyer Power through Producer's Differentiation," Working Papers hal-00243058, HAL.
    8. Dobson, Paul W. & Waterson, Michael, 2007. "The competition effects of industry-wide vertical price fixing in bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 935-962, October.
    9. Reisinger, Markus, 2010. "Unique Equilibrium in Two-Part Tariff Competition between Two-Sided Platforms," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 308, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    10. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09iatrn4log is not listed on IDEAS
    11. Ioannis N. Pinopoulos, 2014. "A note on the effects of downstream free entry on wholesale pricing," Discussion Paper Series 2014_05, Department of Economics, University of Macedonia, revised Sep 2014.
    12. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
    13. Walter Beckert, 2009. "Empirical analysis of buyer power," CeMMAP working papers CWP17/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    14. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
    15. repec:spo:wpmain:info:hdl:2441/eu4vqp9ompqllr09iatrn4log is not listed on IDEAS
    16. Erotokritos Varelas, 2014. "Bank structure and public debt," Discussion Paper Series 2014_06, Department of Economics, University of Macedonia, revised Sep 2014.
    17. José A. Tavera & Tilsa Oré Mónago, 2018. "Milking the Milkers: a Study on Buyer Power in the Dairy Market of Peru," Documentos de Trabajo / Working Papers 2018-470, Departamento de Economía - Pontificia Universidad Católica del Perú.

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    More about this item

    Keywords

    Buyer power; Waterbed effects; Bargaining in the supply chain; Milk; Private-Label; Supermarkets;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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