Working Paper: CEPR ID: DP5803
Authors: Howard Smith; John Thanassoulis
Abstract: This paper considers buyer power in the presence of upstream competition to supply a homogeneous product. A likely consequence of upstream competition is that each supplier is uncertain of its final output, because it does not know how many downstream buyers will select it as a seller. We present a model where, for this reason, final volumes are uncertain for each seller. We find a new source of buyer power when the surplus function is nonlinear: the event of negotiation with a large buyer increases the seller's expected output, which changes the expected average net surplus from the deal; this increases buyer power when the seller's surplus function is concave (and diminishes it when convex). We explore consequences for welfare, industry productivity, and investment incentives.
Keywords: buyer power
JEL Codes: L13; L42; L66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| upstream competition (L13) | uncertainty about final volumes supplied to downstream buyers (L95) |
| uncertainty about final volumes supplied to downstream buyers (L95) | impact on bargaining power of suppliers (L14) |
| expected average costs per unit are lower (D24) | large buyers have preferential deal (L14) |
| expected average costs per unit are higher (D24) | small buyers' bargaining power diminishes (D49) |
| shape of the suppliers' cost functions (D21) | impact on average costs for buyers (F61) |
| returns to scale of suppliers' production processes (D24) | mechanism of buyer power (L11) |
| increasing concentration of suppliers (D43) | absolute transfer price differential grows between large and small buyers (F16) |