Buyer Groups and Buyer Power: The Effect on Outsiders
Social Science Research Network
A buyer group is a subset of downstream firms that pool their demand for an upstream input to negotiate a better deal with suppliers. This paper develops a simple model that shows how a buyer group changes market behavior, focusing on the impact on downstream firms outside the buyer group. This impact critically depends on the ability of input suppliers to commit to a "list" or "market" price. If the input supplier can commit to a market price before bargaining, it will manipulate this price to
... ulate this price to control the "outside options" in the bargaining process. Firms outside the buyer group pay a higher marginal price for the key input, compared to both the price paid by the members of the buyer group and the market price that arises absent the buyer group. However, a rise in the bargaining power of the buyer group lowers the market price. In contrast, if the upstream monopolist cannot commit to a market price before bargaining, then the formation of a buyer group may raise or lower the market price. The distribution of bargaining power is irrelevant in this situation. We illustrate these results using a simple example and discuss the implications for the debate on buyer power and competition.