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Buyer Power Through Producer Differentiation

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  • Villas-Boas, Sofia B
  • Chambolle, Claire
Abstract
This paper shows that a retailer may choose to differentiate his supplying producer from his rival's, at the expense of a downgrading in the quality of the product he offers to consumers, not to relax downstream competition, but to improve his buyer power in the negotiation with his producer. We consider a simple vertical industry where two producers sell products differentiated in quality to two retailers who operate in separated markets. In the game, retailers first choose which product to stock, then each retailer and her chosen producer bargain, where this pairwise bargaining happens sequentially, over the terms of a two-part tariff contract. Finally, retailers choose the quantities. We show that when upstream production costs are convex, the share of the total profits going to the retailer is higher if the latter choose to differentiate. We also are able to isolate the wish to differentiate as "only" due to increasing buyer power: namely that, via producers' differentiation, the retailer gets a larger share of smaller total profits. We show that this result also holds when retailers do not commit ex-ante on which product they stock and, in fact, we show that product differentiation to increase buyer power is even more likely in this case. We also derive the consequences of a differentiation induced by buyer power motives for consumer surplus and welfare, and extend our results for the case of downstream competition.
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  • Villas-Boas, Sofia B & Chambolle, Claire, 2015. "Buyer Power Through Producer Differentiation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0wz728n8, Department of Agricultural & Resource Economics, UC Berkeley.
    • Handle: RePEc:cdl:agrebk:qt0wz728n8
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    Cited by:

    1. Claire Chambolle & Clémence Christin, 2021. "New Product Introduction and Slotting Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 69(2), pages 410-442, June.
    2. Michaela Draganska & Daniel Klapper & Sofia B. Villas-Boas, 2010. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Marketing Science, INFORMS, vol. 29(1), pages 57-74, 01-02.
    3. Emanuele Bacchiega & Olivier Bonroy, 2015. "On the benefits of contractual inefficiency in quality-differentiated markets," Oxford Economic Papers, Oxford University Press, vol. 67(3), pages 846-863.
    4. Emanuele Bacchiega & Olivier Bonroy & Emmanuel Petrakis, 2018. "Contract contingency in vertically related markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(4), pages 772-791, October.
    5. Chambolle, Claire & Christin, Clémence & Molina, Hugo, 2023. "Buyer power and exclusion: A progress report," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    6. Vanessa von Schlippenbach & Isabel Teichmann, 2012. "The Strategic Use of Private Quality Standards in Food Supply Chains," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(5), pages 1189-1201.
    7. Dipankar Das, 2019. "Multilayer of Suppliers Fixed Costs and Spatial Competition in the Upstream Market as a Source of Retailers Buying Power," Studies in Microeconomics, , vol. 7(2), pages 210-226, December.
    8. Allain, Marie-Laure & Avignon, Rémi & Chambolle, Claire, 2020. "Purchasing alliances and product variety," International Journal of Industrial Organization, Elsevier, vol. 73(C).
    9. Fabian Bergès & Claire Chambolle, 2009. "Threat of Exit as a Source of Bargaining Power," Recherches économiques de Louvain, De Boeck Université, vol. 75(3), pages 353-368.
    10. José A. Tavera & Tilsa Oré Mónago, 2018. "Milking the Milkers: a Study on Buyer Power in the Dairy Market of Peru," Documentos de Trabajo / Working Papers 2018-470, Departamento de Economía - Pontificia Universidad Católica del Perú.
    11. Inderst, Roman & Jakubovic, Zlata & Jovanovic, Dragan, 2015. "Buyer Power and Functional Competition for Innovation," MPRA Paper 61214, University Library of Munich, Germany.

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