Buyer Power and the 'Waterbed Effect'
27 Pages Posted: 31 Mar 2008 Last revised: 21 Feb 2014
Date Written: January 2008
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.
Keywords: buyer power, retail concentration
JEL Classification: L11, L13
Suggested Citation: Suggested Citation