Buyer Power and the 'Waterbed Effect'
University of Frankfurt; Imperial College London
Tommaso M. Valletti
Imperial College Business School; University of Rome, Tor Vergata - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR)
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
Date posted: March 31, 2008 ; Last revised: February 21, 2014
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