Thursday, June 26, 2008
Posted by D. Daniel Sokol
Paul Dobson (Loughborough University Business School) and Roman Inderst (Economics and Finance, University of Frankfurt and London School of Economics) discuss The Waterbed Effect: Where Buying and Selling Power Come Together.
ABSTRACT: This Paper considers the competition effects of differential buyer power. The central question addressed is whether the increasing buying power of big retail chains can harm competition to the extent that it makes consumers worse off. This possibility runs counter to the often-made presumption that increasing retail-buyer power serves to countervail supplier power, allowing retailers to obtain increased discounts that are then (at least in part) passed on to consumers through lower retail prices. However, with retailers differing in their ability to exercise buyer power, there is the possibility of a “waterbed effect,” whereby better terms for more powerful buyers lead to a worsening of the terms of supply for less powerful buyers, which in turn may lessen downstream (i.e., retail) competition and harm consumer welfare. This Paper offers guidance on the market mechanisms and precise circumstances that may give rise to such a waterbed effect and the extent to which this may distort downstream competition and impact on consumers.