Countervailing Power and Chain Stores

Countervailing Power and Chain Stores The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream as Galbraith (American capitalism: The concept of countervailing power. Houghton Mifflin, Boston, 1952, Am Econ Rev 44:1–6, 1954) once contended. This paper presents a model that formalizes certain previously neglected elements of Galbraith’s argument, and shows that upstream price concessions may lead to lower downstream prices. In this model, a large retail chain store with countervailing power plays one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. Finally, competition among the retailers drives retail prices lower. The retail-price-restraining effect of the chain is stronger than the effect that is produced by the entry of an additional supplier. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Countervailing Power and Chain Stores

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Publisher
Springer Journals
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1007/s11151-012-9364-6
Publisher site
See Article on Publisher Site

Abstract

The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream as Galbraith (American capitalism: The concept of countervailing power. Houghton Mifflin, Boston, 1952, Am Econ Rev 44:1–6, 1954) once contended. This paper presents a model that formalizes certain previously neglected elements of Galbraith’s argument, and shows that upstream price concessions may lead to lower downstream prices. In this model, a large retail chain store with countervailing power plays one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. Finally, competition among the retailers drives retail prices lower. The retail-price-restraining effect of the chain is stronger than the effect that is produced by the entry of an additional supplier.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Feb 8, 2013

References

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