Wednesday, February 25, 2009

Expropriating Monopoly Rents through Stable Buyer Groups

Posted by D. Daniel Sokol

Chris Doyle, London School of Economics & Political Science (LSE) - Department of Economics and Martijn A. Han, University of Amsterdam - Amsterdam Center for Law & Economics have an interesting piece on Expropriating Monopoly Rents through Stable Buyer Groups.

ABSTRACT: In industries with unobservable wholesale contracting, retailers may jointly extract monopoly profits in their output market through the formation of a buyer group in their input market. Buyer groups allow retailers to credibly commit to input contracts with increased wholesale prices, which serve to reduce combined final output to the monopoly level, where the increased input costs are refunded from suppliers to retailers through slotting allowances. The stability of this anticompetitive mechanism depends on the retailers' incentives to cheat and unobservably source from a supplier outside of the buyer group arrangement at lower input costs. If firms are able to sign exclusive dealing provisions, such deviation is impossible and the buyer group arrangement is stable for all discount factors. In the absence of those provisions, minimum purchase clauses still limit deviant retailers' ability to source from alternative suppliers, making the buyer group induced monopoly outcome as stable as conventional output market collusion.

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