DP5803 Upstream Competition and Downstream Buyer Power
|Author(s):||Howard Smith, John Thanassoulis|
|Publication Date:||August 2006|
|JEL(s):||L13, L42, L66|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5803|
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.