Countervailing power and input pricing: When is a waterbed effect likely?
Stephen King ()
No 27-12, Monash Economics Working Papers from Monash University, Department of Economics
A downstream firm with countervailing power can extract a reduced price from an input supplier. A waterbed effect occurs if this price reduction leads the input supplier to raise the price that it charges another downstream firm. Policy makers have been concerned that this waterbed effect could undermine downstream competition, and it was considered in detail in the 2008 UK grocery inquiry. This paper presents a simple but parsimonious model to investigate if and when a waterbed effect may arise. It shows that the effect may arise through optimal pricing behaviour, but that this critically depends on the nature of upstream technology, downstream competition and consumer demand. In particular, downstream competition tends to work against a waterbed effect, but convex upstream costs support the effect. The analysis is complementary to recent academic work on the waterbed effect that focuses on bargaining constraints.
Pages: 23 pages
New Economics Papers: this item is included in nep-bec, nep-com, nep-ipr and nep-pr~
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://www.buseco.monash.edu.au/eco/research/paper ... vailingpowerking.pdf (application/pdf)
Journal Article: Countervailing Power and Input Pricing: When is a Waterbed Effect Likely? (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:mos:moswps:2012-27
Ordering information: This working paper can be ordered from
http://www.buseco.mo ... eco/research/papers/
Access Statistics for this paper
More papers in Monash Economics Working Papers from Monash University, Department of Economics Department of Economics, Monash University, Victoria 3800, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Simon Angus ().