Buyer Power and the 'Waterbed Effect'

27 Pages Posted: 31 Mar 2008 Last revised: 21 Feb 2014

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

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

Inderst, Roman and Valletti, Tommaso M., Buyer Power and the 'Waterbed Effect' (January 2008). CEIS Research Paper No. 107, Available at SSRN: or

Roman Inderst (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)


Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

United Kingdom

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