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Buyer Power and the 'Waterbed Effect'

Roman Inderst

University of Frankfurt; Imperial College London

Tommaso M. Valletti

Imperial College Business School; University of Rome II - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR)

January 2008

CEIS Research Paper No. 107

We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the waterbed effect). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified waterbed effect holds irrespective of whether a firm grows by acquisition or organically by becoming more efficient.

Number of Pages in PDF File: 27

Keywords: buyer power, retail concentration

JEL Classification: L11, L13

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Date posted: March 31, 2008 ; Last revised: February 21, 2014

Suggested Citation

Inderst, Roman and Valletti, Tommaso M., Buyer Power and the 'Waterbed Effect' (January 2008). CEIS Research Paper No. 107. Available at SSRN: http://ssrn.com/abstract=1113318 or http://dx.doi.org/10.2139/ssrn.1113318

Contact Information

Roman Inderst (Contact Author)
University of Frankfurt ( email )
Grüneburgplatz 1 (H11)
Frankfurt am Main, DE 60323
+49 (69) 798-34023 (Phone)
+49 (69) 798-33912 (Fax)
HOME PAGE: http://www.finance.uni-frankfurt.de/inderst/index.php?lg=1&men=2&case=prof
Imperial College London ( email )
South Kensington Campus
London SW7 2AZ
United Kingdom
Tommaso M. Valletti
Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, DC SW7 2AZ
United Kingdom
University of Rome II - Department of Financial and Quantitative Economics ( email )
Via Columbia n.2
Roma, 00133
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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References:  20
Citations:  8

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