Advertisement

Review of Industrial Organization

, Volume 52, Issue 3, pp 369–402 | Cite as

An Empirical Analysis of Countervailing Power in Business-to-Business Bargaining

  • Walter Beckert
Article
First Online:
  • 172 Downloads

Abstract

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.

Keywords

Countervailing power Bargaining Price discrimination Transaction data 

JEL Classification

D43 L11 L12 L14 L42 C23 C78 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgements

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.

References

  1. Adelman, M. (1959). A & P: A study in price-cost behavior and public policy. Cambridge: Harvard University Press.Google Scholar
  2. Beckert, W., Smith, H., & Takahashi, Y. (2016). Competitive price discrimination in a spatially differentiated intermediate goods market. Unpublished manuscript.Google Scholar
  3. 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
  4. Boulding, W., & Staelin, R. (1990). Environment, market share and market power. Management Science, 36, 1160–1177.CrossRefGoogle Scholar
  5. Bower, R. (1964). Decreasing marginal costs in brick production. The Journal of Industrial Economics, 13(1), 1–10.CrossRefGoogle Scholar
  6. Boyer, K. (1996). Can market power really be estimated? Review of Industrial Organization, 11(1), 115–124.CrossRefGoogle Scholar
  7. Brooks, D. (1973). Buyer concentration: A forgotten element in market structure model. Industrial Organization Review, 1(3), 151–163.Google Scholar
  8. Buzzell, R., Gale, B., & Sultan, R. (1975). Market share—A key to profitability. Harvard Business Review, 53, 97–106.Google Scholar
  9. CEBR. (2016). Not just another brick in the wall. https://www.cebr.com/reports/not-just-another-brick-in-the-wall.
  10. Chipty, T., & Snyder, C. (1999). The role of firm size in bilateral bargaining: A study of the cable television industry. The Review of Economics and Statistics, 81(2), 326–340.CrossRefGoogle Scholar
  11. Clevenger, T., & Campbell, G. (1977). Vertical organization: A neglected element in market structure–performance models. Industrial Organization Review, 5(1), 60–66.Google Scholar
  12. 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.
  13. 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.
  15. 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.
  16. Competition Commission. (2012b). Anglo American PLC and Lafarge SA. https://www.gov.uk/cma-cases/anglo-american-plc-lafarge-s-a-merger-inquiry.
  17. Crawford, G., & Yurukoglu, A. (2012). The welfare effects of bundling in multichannel television markets. The American Economic Review, 102(2), 643–685.CrossRefGoogle Scholar
  18. Directorate General Competition DGComp. (1998). Case no IV/M.1245 -Valeo / ITT industries. http://ec.europa.eu/competition/mergers/cases/decisions/m1245_en.pdf.
  19. 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.
  20. Dobson, P., & Waterson, M. (1997). Countervailing power and consumer prices. The Economic Journal, 107(441), 418–430.CrossRefGoogle Scholar
  21. Draganska, M., Klapper, D., & Villas-Boas, S. (2010). A larger slice or a larger pie? An empirical investigation of bargaining power in the distribution channel. Marketing Science, 29(1), 57–74.CrossRefGoogle Scholar
  22. Ellison, S., & Snyder, C. (2010). Countervailing buyer power in wholesale pharmaceuticals. The Journal of Industrial Economics, 58(1), 32–53.CrossRefGoogle Scholar
  23. Galbraith, J. (1952). American capitalism. The concept of countervailing power. Boston: Houghton Mifflin.Google Scholar
  24. Galbraith, J. (1954). Countervailing power. Papers and proceedings of the sixth annual meeting of the American Economic Association (pp. 1–6).Google Scholar
  25. Giulietti, M. (2007). Buyer and seller power in grocery retailing: Evidence from Italy. Revista de Economia del Rosario, 10(2), 109–125.Google Scholar
  26. Gowrisankaran, G., Nevo, A., & Town, R. (2014). Mergers when prices are negotiated: Evidence from the hospital industry. The American Economic Review, 105(1), 172–203.CrossRefGoogle Scholar
  27. Grennan, M. (2013). Price discrimination and bargaining: Empirical evidence from medical devices. The American Economic Review, 103(1), 145–177.CrossRefGoogle Scholar
  28. Horn, H., & Wolinsky, A. (1988). Bilateral monopolies and incentives for merger. The RAND Journal of Economics, 19(3), 408–419.CrossRefGoogle Scholar
  29. Hortaçsu, A., & Syverson, C. (2007). Cementing relationships: Vertical integration, foreclosure, productivity, and prices. Journal of Political Economy, 115(2), 250–301.CrossRefGoogle Scholar
  30. Hyde, C., & Perloff, J. (1995). Can market power be estimated? Review of Industrial Organization, 10(4), 465–485.CrossRefGoogle Scholar
  31. Inderst, R., & Mazzarotto, N. (2006). Buyer power: Sources, consequences, and policy responses. Unpublished manuscript.Google Scholar
  32. Inderst, R., & Valletti, T. (2009). Price discrimination in input markets. The RAND Journal of Economics, 40(1), 1–19.CrossRefGoogle Scholar
  33. Inderst, R., & Wey, C. (2003). Bargaining, mergers, and the technology choice in bilaterally oligopolistic industries. The RAND Journal of Economics, 34(1), 1–19.CrossRefGoogle Scholar
  34. 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
  35. Lustgarten, S. (1975). The impact of buyer concentration in manufacturing industries. The Review of Economics and Statistics, 57(1), 125–132.CrossRefGoogle Scholar
  36. McAfee, P., & Schwartz, M. (1994). Opportunism in multilateral vertical contracting: Nondiscrimination, exclusivity, and uniformity. The American Economic Review, 84(1), 201–230.Google Scholar
  37. McGukin, R., & Chen, H. (1976). Interactions between buyer and seller concentration: Nondiscrimination, exclusivity, and uniformity. Industrial Organization Review, 4, 123–132.Google Scholar
  38. McKie, J. (1959). Tin cans and tin plate. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  39. Miller, N., & Osborne, M. (2014). Spatial differentiation and price discrimination in the cement industry: Evidence from a structural model. The RAND Journal of Economics, 45(2), 221–247.CrossRefGoogle Scholar
  40. 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.
  41. 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.
  42. Office of Fair Trading OFT. (2011c). Statutory audit services market investigation. https://www.gov.uk/cma-cases/statutory-audit-services-market-investigation.
  43. Smith, H., & Thanassoulis, J. (2008). Upstream competition and downstream buyer power. Unpublished manuscript.Google Scholar
  44. Snyder, C. (1996). A dynamic theory of countervailing power. The RAND Journal of Economics, 27(4), 747–769.CrossRefGoogle Scholar
  45. Stigler, G. (1949). A theory of delivered price systems. The American Economic Review, 39(6), 1144–1159.Google Scholar
  46. Stole, L., & Zwiebel, J. (1996). Intra-firm bargaining under non-binding contracts. The Review of Economic Studies, 63(3), 375–410.CrossRefGoogle Scholar
  47. Syverson, C. (2007). Prices, spatial competition and heterogeneous producers: An empirical test. The Journal of Industrial Economics, 55(2), 197–222.CrossRefGoogle Scholar
  48. Syverson, C. (2008). Ready-mixed concrete. Journal of Economic Perspectives, 22(1), 217–233.CrossRefGoogle Scholar
  49. Thisse, J., & Vives, X. (1988). On the strategic choice of spatial price policy. The American Economic Review, 78(1), 122–137.Google Scholar
  50. 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

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Department of Economics, Mathematics and StatisticsBirkbeck, University of LondonLondonUK

Personalised recommendations

Cite article

Buy options