Downstream Competition and the Effects of Buyer Power

To examine the interaction between buyer power and competition intensity in a downstream market, we construct a model in which oligopolistic retailers compete in quantity in the downstream market and one of them is a large retailer that has its own exclusive supplier. We demonstrate that an increase in the buyer power of the large retailer against its supplier leads to a fall in retail price and consequently an improvement in consumer surplus, and this is true even in the extreme case where the large retailer is a monopoly in the downstream market. More interestingly, we find that the beneficial effects of an increase in buyer power are large when the intensity of downstream competition is low, with the effects being the largest in the case of downstream monopoly. Our findings suggest that the traditional approach to merger reviews, under which an antitrust agency focuses primarily on maintaining competition in local retail markets, can work reasonably well even in a situation where the merger enhances the buyer power of the merged entity.