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Vertical bargaining and retail competition: What drives countervailing power?

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  • Gaudin, Germain

Abstract

This paper investigates the effects of changes in retail market concentration when input prices are negotiated. Results are derived from a model of bilateral Nash-bargaining between upstream and downstream firms which allows for general forms of demand and retail competition. Whether countervailing buyer power arises, in the form of lower negotiated prices following greater concentration downstream, depends on the pass-through rate of input prices to retail prices. Countervailing buyer power arises in equilibrium for a broad class of demand forms, and its magnitude depends on the degree of product differentiation. However, it generally does not translate into lower retail prices because of heightened market power at the retail level. The demand systems commonly used in the literature impose strong restrictions on the results.

Suggested Citation

  • Gaudin, Germain, 2017. "Vertical bargaining and retail competition: What drives countervailing power?," DICE Discussion Papers 195, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), revised 2017.
    • Handle: RePEc:zbw:dicedp:195
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    More about this item

    Keywords

    Countervailing buyer power; Bilateral oligopoly; Vertical relations; Bargaining; Pass-through; Market concentration; Mergers; Entry; Exit;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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