An Empirical Analysis of Countervailing Power in Business-to-Business Bargaining
- 86 Downloads
Pricing schemes in business-to-business (B2B) relationships reflect price discrimination and bargaining over rents. Bargaining outcomes are determined by upstream market power and countervailing buyer power downstream. This paper uses a panel of B2B transactions in the UK brick market to study B2B transaction prices. The empirical analysis identifies three effects on prices: nonlinear volume and freight absorption effects; countervailing power effects that arise from buyers’ local commercial significance; and competition effects that are due to the buyers’ local potential suppliers. And it shows that small buyers benefit more from competition than do large buyers because they are not constrained by the suppliers’ capacity.
KeywordsCountervailing power Bargaining Price discrimination Transaction data
JEL ClassificationD43 L11 L12 L14 L42 C23 C78
This paper is a non-structural companion paper to my structural work with Howard Smith and Yuya Takahashi. I am grateful for valuable comments and suggestions by Lawrence J. White and two anonymous referees, and for helpful discussions with Howard Smith and Yuya Takahashi, as well as with Richard Blundell, Kate Collyer, Yongmin Chen, Rachel Griffith, Dave Jevons, Sandeep Kapur, Nicola Mazzarotto, Arina Nikandrova, Hiroshi Ohashi, David Sappington, Philipp Schmidt-Dengler, Ron Smith, John Thanassoulis, Mike Whinston, and seminar audiences at Cambridge, the IFS, ESMT, HKUST, and UEA. I am indebted to executives of the UK brick industry for letting me use their data. I also thank the Economic and Social Research Council for financial support under Grant ES/M007421/1. The views expressed in this paper are the sole responsibility of the author.
- Adelman, M. (1959). A & P: A study in price-cost behavior and public policy. Cambridge: Harvard University Press.Google Scholar
- Beckert, W., Smith, H., & Takahashi, Y. (2016). Competitive price discrimination in a spatially differentiated intermediate goods market. Unpublished manuscript.Google Scholar
- Bonnet, C., & Dubois, P. (2010). Non-linear contracting and endogenous buyer power between manufacturers and retailers: Empirical evidence on food retailing in France. TSE working paper, no. 10-190.Google Scholar
- Brooks, D. (1973). Buyer concentration: A forgotten element in market structure model. Industrial Organization Review, 1(3), 151–163.Google Scholar
- Buzzell, R., Gale, B., & Sultan, R. (1975). Market share—A key to profitability. Harvard Business Review, 53, 97–106.Google Scholar
- CEBR. (2016). Not just another brick in the wall. https://www.cebr.com/reports/not-just-another-brick-in-the-wall.
- Clevenger, T., & Campbell, G. (1977). Vertical organization: A neglected element in market structure–performance models. Industrial Organization Review, 5(1), 60–66.Google Scholar
- Competition Commission. (2003). Market investigation references: Competition commission guidelines. http://webarchive.nationalarchives.gov.uk/20111202165157.. http://www.competition-commission.org.uk/rep_pub/rules_and_guide/pdf/cc3.pdf.
- Competition Commission. (2007). Wienerberger finance service BV and Baggeridge Plc. https://www.gov.uk/cma-cases/wienerberger-finance-service-bv-baggeridge-brick-plc-merger-inquiry-cc.
- Competition Commission. (2008). Groceries market investigation. http://webarchive.nationalarchives.gov.uk/20120120004636. http://www.competition-commission.org.uk//rep_pub/reports/2008/538grocery.htm.
- Competition Commission. (2012a). Aggregates, cement, and ready-mix concrete market investigation. https://www.gov.uk/cma-cases/aggregates-cement-and-ready-mix-concrete-market-investigation.
- Competition Commission. (2012b). Anglo American PLC and Lafarge SA. https://www.gov.uk/cma-cases/anglo-american-plc-lafarge-s-a-merger-inquiry.
- Directorate General Competition DGComp. (1998). Case no IV/M.1245 -Valeo / ITT industries. http://ec.europa.eu/competition/mergers/cases/decisions/m1245_en.pdf.
- Directorate General Competition DGComp. (2010). Best practices for the submission of economic evidence and data collection in cases concerning the application of articles 101 and 102 treaty on the functioning of the European Union and in merger cases. http://ec.europa.eu/competition/consultations/2010_best_practices/best_practice_submissions.pdf.
- Galbraith, J. (1952). American capitalism. The concept of countervailing power. Boston: Houghton Mifflin.Google Scholar
- Galbraith, J. (1954). Countervailing power. Papers and proceedings of the sixth annual meeting of the American Economic Association (pp. 1–6).Google Scholar
- Giulietti, M. (2007). Buyer and seller power in grocery retailing: Evidence from Italy. Revista de Economia del Rosario, 10(2), 109–125.Google Scholar
- Inderst, R., & Mazzarotto, N. (2006). Buyer power: Sources, consequences, and policy responses. Unpublished manuscript.Google Scholar
- Katz, M. (1987). The welfare effects of third-degree price discrimination in intermediate good markets. The American Economic Review, 77(1), 154–167.Google Scholar
- McAfee, P., & Schwartz, M. (1994). Opportunism in multilateral vertical contracting: Nondiscrimination, exclusivity, and uniformity. The American Economic Review, 84(1), 201–230.Google Scholar
- McGukin, R., & Chen, H. (1976). Interactions between buyer and seller concentration: Nondiscrimination, exclusivity, and uniformity. Industrial Organization Review, 4, 123–132.Google Scholar
- Office of Fair Trading OFT. (2011a). Aggregates, cement and ready-mix concrete market investigation. https://www.gov.uk/cma-cases/aggregates-cement-and-ready-mix-concrete-market-investigation.
- Office of Fair Trading OFT. (2011b). Proposed Joint Venture between Anglo American PLC and Lafarge SA. https://www.gov.uk/cma-cases/anglo-american-plc-lafarge-s-a-merger-inquiry.
- Office of Fair Trading OFT. (2011c). Statutory audit services market investigation. https://www.gov.uk/cma-cases/statutory-audit-services-market-investigation.
- Smith, H., & Thanassoulis, J. (2008). Upstream competition and downstream buyer power. Unpublished manuscript.Google Scholar
- Stigler, G. (1949). A theory of delivered price systems. The American Economic Review, 39(6), 1144–1159.Google Scholar
- Thisse, J., & Vives, X. (1988). On the strategic choice of spatial price policy. The American Economic Review, 78(1), 122–137.Google Scholar
- Villas-Boas, S. (2007). Vertical relationships between manufacturers and retailers: Inference with limited data. The Review of Economic Studies, 74(2), 626–652.Google Scholar