The Power of a Strategic Buyer with Perfect and Imperfect Monitoring

We analyze the implications of the buyer’s strategic power in the model of dynamic price competition. Two sellers with a limited inventory sell to a single buyer, who has unit for in each of several time periods. The market power of the sellers is offset by the strategic power of the buyer. By not consuming in any period, the buyer can destroy a unit of demand, thereby intensifying future price competition. If transactions are perfectly observed, we find that that a strategic buyer can do significantly better than non-strategic buyers. This excercise of strategic power may give rise to inefficiencies. However, if an agent only perfectly observes those transactions in which he is directly involved, and imperfectly observes other transactions, the strategic power of the buyer is reduced. In some cases, buyer power may be completely eliminated.