Buyer Power in Distribution

Group MembersArslan AftabAsim Liaquat

Muhammad BilalMuhammad Waleed Usman

Sakina Mannan

IntroductionO Several Level of Distribution Involved

O Competitive forces play at each distribution level

O Selling directly or through retailers

O Powerful Buyers influence

Sources of Buyer Power

O Bilateral negotiations over supply contracts.

O Buyer’s Size on the distribution of bargaining power.

O Monophony powerO Buyer power represents the perfect

mirror image of seller powerO Simple bargaining setting

Cont…..O Competition between retailers

O Tacit or explicit coordination among suppliers

O Role of information

Buyer Power in RetailingO Fundamental changes in retailing industry

O Efficiency gains from integrating backwardsO Rise of the supermarket formatO Larger retailers gaining a stronger position in

negotiatingO Buyer power and retailers’ sizeO Retailers’ gate keeping function and suppliers’

dependency

Waleed’s Part

Buyer Power and Foreclosure

O The party that wants to exclude a rival must essentially “bribe” firms on the other side of the market into such an arrangement by sharing some of the higher profits generated by the exclusion

O If suppliers have still to be bribed or coerced into excluding a particular retailer, then powerful incumbents may be better placed to do so

Cont’d…O While reducing competition “on the

shelf” this can sufficiently enhance competition “for the shelf” so as to make it a worthwhile strategy for the buyer

Incentives to invest and innovate

O The exercise of buyer power could stifle suppliers’ incentives to invest and innovate

O In reality a supplier may have to unilaterally shoulder a larger fraction or even all of the upfront costs to develop a new product, hoping that it can subsequently realize an adequate return when negotiating with its different buyers

O Incentives generally depend not so much on the overall level of its profits as on the incremental profits that may be generated by the investment, which need not be lower in the presence of larger or otherwise more powerful buyers

O In fact, compared to a situation where product innovation, branding, and promotion are all dominated by manufacturers, the presence of large and sophisticated retailers with their own strong umbrella brands may also stimulate innovation by creating fiercer “vertical competition”, that is competition between upstream and downstream firms over the share of the functions of innovation, marketing, production etc. in the supply chain and the associated margins

CONCLUSION

Two objectives:O Provide a survey of recent

contributions to the economic literature on the sources and consequences of buyer power.

O Economic perspective on a broader spectrum of issues that seem to be relevant for antitrust authorities that have to deal with buyer power.

Issues that need to be addressed:O Whether the formation of

larger/powerful buyers is conducive to harmful vertical restraints.

O whether the presence of market power at both the upstream and downstream level of the supply chain could be harmful.

O To what extent would “exploitative and abusive” contractual practices are the outcome of efficient negotiations or whether they are also in the short-run.

O Better study could be carried out if empirical data is available.