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Revises CUDARE Working Paper 1042, June 8th 2007 of the same title "Buyer power through producer's differentiation"

Download the Paper (575 K, PDF file) - September 9, 2008 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

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.

SUGGESTED CITATION:
Claire Chambolle and Sofia B. Villas-Boas, "Buyer Power through Producer's Differentiation" (September 9, 2008). Department of Agricultural & Resource Economics, UCB. CUDARE Working Paper 1042.
http://repositories.cdlib.org/are_ucb/1042