hero working papers

Buyer Power and Quality Improvement

Number: 310
Year: 2006
Author(s): Pierpaolo Battigalli, Chiara Fumagalli and Michele Polo
This paper analyses the sources of buyer power and its effect
on sellers' investment. We show that a retailer extracts a larger
surplus from the negotiation with an upstream manufacturer the
more it is essential to the creation of total surplus. In turn, this
depends on the rivalry between retailers in the bargaining process.
Rivalry increases when the retail market is more fragmented, when
the retailers are less differentiated and when decreasing returns to
scale in production are larger. The allocation of total surplus affects
also the incentives of producers to invest in product quality, an instance
of the hold up problem. This not only makes both the supplier and
consumers worse off, but it may harm also the retailers.

Kewords: Retailers' power, Hold-up, Supplier's under-investment