Working Paper: CEPR ID: DP3547
Authors: Roman Inderst; Christian Wey
Abstract: This Paper investigates how the formation of larger buyers affects a supplier's profits and, by doing so, his incentives to undertake non-contractible activities. We first identify two channels of buyer power, which allows larger buyers to obtain discounts. We subsequently examine the effects of buyer power on the supplier's incentives and social welfare. Contrary to some informal claims in the policy debate on buyer power, we find that the exercise of buyer power -even though reducing supplier's profits- may often increase a supplier's incentive to undertake welfare enhancing activities.
Keywords: buyer power; mergers; retailing
JEL Codes: C78; D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Larger buyers reduce suppliers' profits (D21) | Larger buyers increase suppliers' incentives to undertake product innovation (L14) |
| Larger buyers increase suppliers' incentives to undertake product innovation (L14) | Suppliers shift production technology to lower incremental costs (D24) |
| Larger buyers increase suppliers' incentives to undertake product innovation (L14) | Increase output and improve overall welfare (D69) |
| Larger buyers spur suppliers' incentives (L14) | Contradicts view that buyer power dampens supplier incentives (L14) |