11 Pages Posted: 5 Apr 2009
Date Written: April 4, 2009
We develop a model of retail competition and negotiations with an upstream supplier for several firms of different sizes. Contrary to existing thinking, we demonstrate that the larger a buyer the less countervailing power he possesses over the supplier. The reason for this is that a buyer's outside option - the ability to integrate backwards - becomes proportionately weaker as he grows in size as self-production is characterised by diseconomies of scale. This result emphasises that any analysis of countervailing power must go beyond a simple examination of a buyer's size, and must instead fully investigate the relative bargaining positions of suppliers and buyers.
Keywords: Buyer Power, Countervailing Power
JEL Classification: L14, L25, L40
Suggested Citation: Suggested Citation