We consider a set-up with vertical contracting between a supplier and a retail industry where a large retailer competes with smaller retailers that carry a narrower range of products. Consumers are heterogeneous in their shopping costs; they will either be multistop shoppers or one-stop shoppers. The countervailing power of the large retailer is modeled as a threat of demand-side substitution. We show that retail prices are higher, and industry surplus and social welfare fall, when the large retailer possesses countervailing power. Increasing marginal wholesale prices discourages multistop shopping behavior of consumers, making demand substitution less attractive for the large retailer.
countervailing power; buyer power; polarization of the retail industry; shopping costs;
- D43: Oligopoly and Other Forms of Market Imperfection
- L13: Oligopoly and Other Imperfect Markets
- L40: General
- L81: Retail and Wholesale Trade • e-Commerce
Stéphane Caprice, and Shiva Shekhar, “On the countervailing power of large retailers when shopping costs matter”, TSE Working Paper, n. 17-771, March 2017.
TSE Working Paper, n. 17-771, March 2017