Vertical Bargaining and Countervailing Power

CEIS Working Paper No. 160

27 Pages Posted: 3 Mar 2010 Last revised: 25 Feb 2014

See all articles by Alberto Iozzi

Alberto Iozzi

Universita degli Studi di Roma

Tommaso M. Valletti

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

Date Written: March 2, 2010

Abstract

We study the existence of countervailing buyer power in a vertical industry where the input price is set via Nash bargainings between one upstream supplier and many differentiated but competing retailers. In case one bilateral bargaining fails, the supplier still has the ability to sell to the other retailers. We show that the capacity of these other retailers to react in the final market has a dramatic impact on the supplier’s outside options and, ultimately, on input prices and welfare. Under downstream quantity competition, we find either no or opposite support to the hypothesis of countervailing power on input prices, as the retail industry becomes more concentrated. With price competition, we find a case for countervailing power, but its existence depends on the degree of product differentiation and on the ability of competing retailers to react to a disagreement.

Keywords: Countervailing buyer power, Nash bargaining

JEL Classification: L50

Suggested Citation

Iozzi, Alberto and Valletti, Tommaso M., Vertical Bargaining and Countervailing Power (March 2, 2010). CEIS Working Paper No. 160. Available at SSRN: https://ssrn.com/abstract=1562804 or http://dx.doi.org/10.2139/ssrn.1562804

Alberto Iozzi (Contact Author)

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (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)

London
United Kingdom

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