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Vertical bargaining and countervailing power
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Vertical bargaining and countervailing power

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Abstract

We study the existence of countervailing buyer power in a vertical industry where the input price is set via Nash bargainings between one upstream supplier and many differentiated but competing retailers. In case one bilateral bargaining fails, the supplier still has the ability to sell to the other retailers. We show that the capacity of these other retailers to react in the final market has a dramatic impact on the supplier’s outside options and, ultimately, on input prices and welfare. Under downstream quantity competition, we find either no or opposite support to the hypothesis of countervailing power on input prices, as the retail industry becomes more concentrated. With price competition, we find a case for countervailing power, but its existence depends on the degree of product differentiation and on the ability of competing retailers to react to a disagreement.

Suggested Citation

  • Alberto Iozzi & Tommaso Valletti, 2010. "Vertical bargaining and countervailing power," CEIS Research Paper 160, Tor Vergata University, CEIS, revised 28 May 2010.
    • Handle: RePEc:rtv:ceisrp:160
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    More about this item

    Keywords

    Countervailing buyer power; Nash bargaining.;

    JEL classification:

    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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