Abstract

http://ssrn.com/abstract=936984
 
 

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Buyer Power and Quality Improvements


Pierpaolo Battigalli


University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) - Department of Economics (DEP); Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS)

Chiara Fumagalli


Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Michele Polo


Bocconi University - Department of Economics

September 2006

CEPR Discussion Paper No. 5814

Abstract:     
This paper analyses the sources of buyer power and its effect on sellers' investment in quality improvements. In our model retailers make take-it-or-leave-it offers to a producer and each of them obtains its marginal contribution to total profits (gross of sunk costs). In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus affects the incentives of the producer to invest in product quality, an instance of the hold-up problem. An increase in buyer power not only makes the supplier and consumers worse off, but it may even harm retailers, that obtain a larger share of a smaller surplus. A repeated game argument shows that efficient quality improvements can be supported as an equilibrium outcome if the producer and retailers are involved in a long-term relationship.

Number of Pages in PDF File: 37

Keywords: Buyer power, non-cooperative bargaining, hold-up

JEL Classification: L13, L4

working papers series





Date posted: October 12, 2006  

Suggested Citation

Battigalli, Pierpaolo and Fumagalli, Chiara and Polo, Michele, Buyer Power and Quality Improvements (September 2006). CEPR Discussion Paper No. 5814. Available at SSRN: http://ssrn.com/abstract=936984

Contact Information

Pierpaolo Battigalli (Contact Author)
University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) - Department of Economics (DEP) ( email )
Via Gobbi 5
Milan, 20136
Italy
University of Milan, Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )
Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Chiara Fumagalli
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Michele Polo
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
Italy
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