Are Supermarkets Squeezing Small Suppliers? Evidence from Negotiated Wholesale Prices

Abstract

Conventional wisdom is that big‐box retailers squeeze the profits of small suppliers. Underlying this belief is the assumption that relative market size is the primary source of bargaining leverage. Using actual wholesale prices, we study profit‐sharing between large retailers and suppliers of different size. We find that the median supplier earns 42% of the channel surplus, and that some very small suppliers attain a share of the channel surplus close to that of the largest supplier (about 68%). Using a Nash bargaining model, we find that small suppliers can gain bargaining leverage by maintaining a base of loyal customers.

An Empirical Model of Bargaining with Equilibrium of Fear: Application to Retail Mergers in the French Soft Drink Industry

“…Our article provides a methodological contribution to the recent empirical literature on buyer-seller bargaining in bilateral oligopolies. Since Draganska, Klapper and Villas-Boas (2010), a large number of articles have adopted the timing assumption that wholesale and retail prices are determined simultaneously to simplify the estimation and computation of the "Nash-in-Nash" bargaining model (see, e.g., Ho and Lee, 2017;Noton and Elberg, 2018;Sheu and Taragin, 2021). While reasonable in the presence of retail price stickiness, it does not reflect well the functioning of vertical markets in which retailers can easily change retail prices of products.…”

Foreign direct investment in vertically related markets

“…The more fierce is downstream competition, the stronger are U 's incentives to behave opportunistically, and thus, the more severe is its commitment problem that results in lower wholesale prices. This finding gives rise to the following testable implication, which, to the best of our knowledge, has not been examined yet by the empirical literature on vertical contracting (e.g., Villas‐Boas , Bonnet and Dubois , Noton and Elberg ): when vertical trading takes place through private non‐linear contracts and the upstream market is concentrated, we should observe lower wholesale prices in markets with more downstream firms.…”

'Nash-in-Nash' Bargaining: A Microfoundation for Applied Work

“…Second, although profit functions depend on the set of agreements that have been formed, they do not depend on negotiated payments. Both restrictions hold in many models of wage negotiations between employers and workers (e.g., Horn and Wolinsky, 1988b;Jun, 1989;Westermark, 2003) and in some applied papers in industrial organization settings (e.g., Noton and Elberg, 2017).…”