Vertical bargaining and countervailing power

Vertical bargaining and countervailing power
Document type
Discussion paper
Author(s)
Iozzi, Alberto Valletti, Tommaso
Publisher
Imperial College Business School
Date of publication
3 June 2010
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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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.

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