Buyer Power from Joint Listing Decision

Abstract

We consider a model of vertically related markets, in which an upstream firm faces a competitive fringe of less efficient suppliers and negotiates with customers that compete in a downstream market. We allow downstream firms to form a buyer group which selects suppliers on behalf of its members. We show that transforming individual listing decisions into a joint listing decision makes delisting less harmful for a group member, which in turn enhances the group members’ bargaining position at the expense of the upstream firm. We also discuss the implication for upstream investment incentives.

Multilayer of Suppliers Fixed Costs and Spatial Competition in the Upstream Market as a Source of Retailers Buying Power

“…More price leadership events are price reductions than price increases, consistently led by the smaller firm (Seaton & Waterson, 2013). Transforming individual listing decisions into a joint listing decision makes delisting less harmful for a group member; this, in turn, enhances the group members’ bargaining position at the expense of the upstream leader (Caprice & Rey, 2015). In our case, STs make a group and act as a consolidator.…”

Purchasing alliances and product variety

“…We do not explicitly model the redistribution process, but we assume that the decision is efficient: the alliance strategy maximizing the joint profit is implemented in equilibrium. As the buying strategy only affects the listing decision stage, we are close to Caprice and Rey (2015) who also assume that within a buying group, downstream firms make common listing decisions, 19 but keep negotiating secretly and bilaterally with their suppliers. This assumption contrasts with the setup of Inderst and Shaffer (2007), who focus on cross border mergers and thus assume that once merged, the retailers enter in a joint bargaining with their suppliers.…”

“…Yet it has been widely documented that tariffs in the retail sector are scarcely linear (see Berto Villas-Boas (2007) and Bonnet and Dubois (2010)), and that the retail sector has achieved a high level of concentration both in Europe and in the United States (see Allain et al (2017), Barros et al (2006), and Hosken et al (2018)). Furthermore, recent empirical and theoretical developments point out potential adverse effects of buyer power on product variety and innovation (see European Economic Community (2014) and Inderst and Mazzarotto (2008) for a survey, Inderst and Shaffer (2007), Caprice and Rey (2015) and Chambolle and Villas-Boas (2015). )…”

“…A large part of the existing literature on buying groups focuses on the rationality of purchasing cooperation between retailers who compete on the downstream market. In such a framework, Caprice and Rey (2015) show that a joint listing decision enhances each retailer's buyer power by increasing its outside option in the negotiation with a supplier: in case of a breakdown in the negotiation, the profit of the retailer decreases less, as its competitors also delist the products of this supplier. We consider instead the incentives of non-competing retailers to form a buying group.…”

“…More precisely,Caprice and Rey (2015) assume that any retailer can veto the offer of a supplier for all the members of the buying group.…”