Faculty of Economics and Business Administration Publications Database

Buyer Power and Supplier Incentives

Wey, Christian
Volume: 51
Number: 3
Pages: 647 - 667
Month: April
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2007
Keywords: Buyer power; Merger; Retailing
Abstract: This paper analyzes the origins and welfare consequences of buyer power. We show that if suppliers are capacity constrained or have strictly convex costs, there are two different channels through which large buyers can obtain more favorable terms from their suppliers. In particular, we show how the presence of large buyers can then erode the value of suppliers’ outside option. Somewhat surprisingly, we show how this can induce suppliers to undertake strategies that lead to higher output and potentially higher welfare.