Dominant Retailers and the Countervailing Power Hypothesis

Zhiqi Chen

No 01-05, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The growing dominance of powerful big-box retailers in recent years has enhanced the interests in Galbraith's (1952) hypothesis of countervailing power. The objective of this paper is to assess rigorously this hypothesis using a theoretical model that captures the main ingredients of Galbraith's arguments as well as some of the important features of retail industry. It is demonstrated that consistent with the hypothesis an increase in the amount of countervailing power possessed by a dominant retailer can indeed lead to a fall in retail price for consumers. But this fall in retail price is not the result of a benevolent retailer acting on behalf of consumers but of a self-interested supplier trying to offset the reduction in profits caused by the rise in countervailing power. Total surplus does not always increase with the rise of countervailing power because of the possible efficiency loss on production side. Furthermore, the presence of fringe competition is crucial for countervailing power to benefit consumers and that there is a limit to how far a dominant retailer will go in its pursuit of countervailing power. The analysis in this paper, therefore, does not support the contention that countervailing power can replace competition as the regulatory mechanism of the economy.

Keywords: countervailing power; buyer power; dominant firm (search for similar items in EconPapers)
JEL-codes: L13 L42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2001, Revised 2003
New Economics Papers: this item is included in nep-agr and nep-mic
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Citations: View citations in EconPapers (109)

Published: Revised version in RAND Journal of Economics, Vol. 34, No. 4 (Winter 2003), pp. 612–625

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Journal Article: Dominant Retailers and the Countervailing-Power Hypothesis (2003)
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