Buyer Power and Supplier Incentives
WZB, Markets and Political Economy Working Paper No. SP II 2003-05
33 Pages Posted: 30 Nov 2003
Date Written: June 2003
This paper investigates how the formation of larger buyers affects a supplier's profits and, by doing so, his incentives to undertake non-contractible activities. We first identify two channels of buyer power, which allows larger buyers to obtain discounts. We subsequently examine the effects of buyer power on the supplier's incentives and on social welfare. Contrary to some informal claims in the policy debate on buyer power, we find that the exercise of buyer power - even though reducing supplier's profits - may often increase a supplier's incentive to undertake welfare enhancing activities.
Keywords: Buyer Power, Investments, Competition Policy
JEL Classification: D43, L13, L40
Suggested Citation: Suggested Citation