Buyer power, welfare and public policy

This thesis consists of an introductory chapter and three essays that investigate, from a theoretical perspective, the sources and welfare implications of increasing buyer power in vertically related markets. Retail markets have experienced a trend towards increasing consolidation over the past 20-30 years, with the emergence of large retail chains and ever larger retail outlets. The market for grocery retailing, in particular, is a good example. These trends are widely believed to have shifted the bargaining power away from the suppliers towards their retailers. The consolidation process has also enabled large retailers to employ new strategies, such as the development of retailer-owned brands, also called private labels, something which is believed to have strengthened the retailersbargaining position further. This thesis analyses the competition and welfare implications of some of these recent trends. The rst essay, Private labels, rent-shifting and consumer welfare, investigates a retailers decision to introduce a private label, and asks how the retailers access to a private label may a¤ect the pricing of substitute national brands. We consider a model with two vertically di¤erentiated national brand manufacturers that negotiate sequentially with a monopolist retailer over two-part tari¤s. We nd that when the retailer decides to introduce a private label, this always generates a price increase for one of the two national brands. Moreover, when we endogenise the order of negotiations, we nd that i) the retailers private label is always introduced, and ii) the private label always causes a price increase for the high-quality national brand only. In our model, this price increase does not occur due to a price discrimination e¤ect, as in Gabrielsen and Sorgard (2007) [Private labels, price rivalry, and public policy, European Economic Review, (51), 403424], but as a result of a rent-shifting e¤ect. The welfare implications of private label introduction are discussed. The second essay, Buyer power and exclusion in vertically related markets, coauthored with Tommy Staahl Gabrielsen, explore how the incentives for exclusion, both in upstream and downstream vertical markets, are related to the bargaining position of suppliers and retailers. We consider a model with a dominant upstream manufacturer and a competitive fringe of producers of imperfect substitutes o¤ering their products to two di¤erentiated downstream retailers. In this model we contrast the equilibrium outcome in two alternative situations. The rst one is when the dominant supplier holds all the bargaining power, and this is compared with the outcome when the retailers have all the bargaining power. We show that exclusion occurs when the degree of interbrand and intrabrand competition (competition between brands and the retailers, respectively) is strong. Moreover, in contrast to the received literature, we nd that when retailers have buyer power, this enhances welfare, by o¤ering the consumer more choice at lower prices, compared to when the manufacturer holds all the bargaining power. The third essay, The buyer power of multiproduct retailers: Competition with onestop shopping, illustrates how, in local retail markets, a multiproduct retailer may gain buyer power when some consumers are one-stop shoppers (multi-product shoppers). We consider a model where independent suppliers negotiate terms of trade with a large multiproduct retailer and a group of smaller single product retailers, respectively. We nd that an increase in the share of one-stop shoppers intensi es the degree of competition between the retailers, and hence reduces the overall industry pro t while at the same time enabling the multiproduct retailer to obtain discounts from its suppliers, in the form of lower xed fees. We also show that the presence of a large retailer may positively a¤ect the suppliersincentives to invest in product quality or cost reductions.