Buyer Power and Quality Improvement

IGIER Working Paper No. 310

46 Pages Posted: 18 Apr 2006

See all articles by Pierpaolo Battigalli

Pierpaolo Battigalli

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) - Department of Economics (DEP); Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS)

Chiara Fumagalli

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Michele Polo

Bocconi University - Department of Economics

Date Written: March 2006

Abstract

This paper analyses the sources of buyer power and its expect on sellers investment. We show that a retailer extracts a larger surplus from the negotiation with an upstream manufacturer the more it is essential to the creation of total surplus. In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when the retail market is more fragmented, when the retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus affects also the incentives of producers to invest in product quality, an instance of the hold up problem. This not only makes both the supplier and consumers worse off, but it may harm also the retailers.

Keywords: Retailers' power, Hold-up, Supplier's under-investment

JEL Classification: L13, L4

Suggested Citation

Battigalli, Pierpaolo and Fumagalli, Chiara and Polo, Michele, Buyer Power and Quality Improvement (March 2006). IGIER Working Paper No. 310. Available at SSRN: https://ssrn.com/abstract=896442 or http://dx.doi.org/10.2139/ssrn.896442

Pierpaolo Battigalli (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) - Department of Economics (DEP) ( email )

Via Gobbi 5
Milan, 20136
Italy

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Chiara Fumagalli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Michele Polo

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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