Buyer Market Power and Vertically Differentiated Retailers

University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2010-1

34 Pages Posted: 4 Feb 2010  

Shinn-Shyr Wang

University of Massachusetts Amherst - Isenberg School of Management

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Nathalie Lavoie

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics

Date Written: January 25, 2010

Abstract

We consider a model of vertical competition where downstream firms (retailers) purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the effects of introducing a large retailer, such as a Wal-Mart Supercenter, that is able to lower wholesale prices (i.e. buyer market power). We obtain two main results. First, the store with no buyer market power responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance shoppers’ buying experience (i.e. quality). Second, the presence of a large retailer causes consumer welfare to increase. There are, however, two reasons for the increase in consumer welfare: consumers gain from the large retailer’s low price (because the upstream discount is partially passed on to the retail price) as well as from the high quality level offered by the traditional retailer. Contrary to the conventional wisdom most of the consumer welfare gains seem due to the latter. The intuition for this result is that price competition softens substantially as a result of firms’ quality differentiation. We also investigate the effects of buyer market power on retail and wholesale prices as well as on producer welfare.

Keywords: buyer market power, vertical differentiation, Wal-Mart

JEL Classification: D43, L13, L81, M31, Q13

Suggested Citation

Wang, Shinn-Shyr and Rojas, Christian and Lavoie, Nathalie, Buyer Market Power and Vertically Differentiated Retailers (January 25, 2010). University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2010-1. Available at SSRN: https://ssrn.com/abstract=1542166 or http://dx.doi.org/10.2139/ssrn.1542166

Shinn-Shyr Wang (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Christian Rojas

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States

Nathalie Lavoie

University of Massachusetts at Amherst - College of Natural Resources & the Environment - Department of Resource Economics ( email )

Stockbridge Hall
80 Campus Center Way
Amherst, MA 01003-9246
United States
413-545-5713 (Phone)
413-545-5853 (Fax)

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