Nathalie Lavoie (University of Massachusets), “Buyer Power and Vertically Differentiated Retailers”, Agricultural and Food Industrial Organization Seminar, Toulouse: TSE, June 4, 2012, 11:00–12:30, room MS 003.
We consider a model of vertical competition where retailers purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the price, quality and welfare effects of introducing a large retailer, such as Costco or a Wal-Mart Supercenter, that is able to obtain lower wholesale prices (i.e., countervailing buyer power). We obtain two main results. First, the store with no buyer power (a “traditional retailer”) responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance consumers’ shopping experience. Second, the presence of a large retailer causes consumer welfare to increase through two different channels: a) the upstream discount obtained by the large retailer is partially passed on to the retail price, and b) a greater quality offered by the traditional retailer. Contrary to conventional wisdom, most of the consumer welfare gains in our model are, at low levels of countervailing power, due to the latter channel. Keywords: buyer power, vertical differentiation, Wal-Mart, waterbed effect