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Buyer Market Power and Vertically Differentiated Retailers

Shinn-Shyr Wang (), Christian Rojas () and Nathalie Lavoie ()
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Shinn-Shyr Wang: Department of Resource Economics, University of Massachusetts Amherst
Christian Rojas: Department of Resource Economics, University of Massachusetts Amherst
Nathalie Lavoie: Department of Resource Economics, University of Massachusetts Amherst

No 2010-1, Working Papers from University of Massachusetts Amherst, Department of Resource Economics

Abstract: We consider a model of vertical competition where downstream firms (retailers) purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the effects of introducing a large retailer, such as a Wal-Mart Supercenter, that is able to lower wholesale prices (i.e. buyer market power). We obtain two main results. First, the store with no buyer market power responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance shoppers’ buying experience (i.e. quality). Second, the presence of a large retailer causes consumer welfare to increase. There are, however, two reasons for the increase in consumer welfare: consumers gain from the large retailer’s low price (because the upstream discount is partially passed on to the retail price) as well as from the high quality level offered by the traditional retailer. Contrary to the conventional wisdom most of the consumer welfare gains seem due to the latter. The intuition for this result is that price competition softens substantially as a result of firms’ quality differentiation. We also investigate the effects of buyer market power on retail and wholesale prices as well as on producer welfare.

Keywords: buyer market power; vertical differentiation; Wal-Mart (search for similar items in EconPapers)
JEL-codes: D43 L13 L81 M31 Q13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-01
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