DP3547 Buyer Power and Supplier Incentives

Author(s): Roman Inderst, Christian Wey
Publication Date: September 2002
Keyword(s): buyer power, mergers, retailing
JEL(s): C78, D43, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3547

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.