Accessible Requires Authentication Published by De Gruyter July 13, 2012

Buyer Power and Vertically Differentiated Retailers

Christian Rojas, Nathalie Lavoie and Shinn-Shyr Wang

Abstract

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, which 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, at low levels of countervailing power, most of the consumer welfare gains accrue to consumers with the highest willingness to pay for quality, due to the latter channel.

Published Online: 2012-7-13

©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston