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Buyer power and supplier incentives |
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| Authors: | Roman Inderst Christian Wey |
| Institution: | a Department of Economics and Department of Accounting and Finance, London School of Economics, Houghton Street, London WC2A 2AE, UK b Deutsches Institut fuer Wirtschaftsforschung (DIW Berlin), Koenigin-Luise-Str. 5, 14195 Berlin, Germany c Technische Universitaet Berlin, Berlin, Germany d CEPR, London, UK |
| Abstract: | This paper analyzes the origins and welfare consequences of buyer power. We show that if suppliers are capacity constrained or have strictly convex costs, there are two different channels through which large buyers can obtain more favorable terms from their suppliers. In particular, we show how the presence of large buyers can then erode the value of suppliers’ outside option. Somewhat surprisingly, we show how this can induce suppliers to undertake strategies that lead to higher output and potentially higher welfare. |
| Keywords: | L12 L41 D43 |
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