Buyer Groups, Antitrust and Outsiders

Abstract

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 study develops a simple model that shows how a buyer group changes market behaviour, focusing on the impact on downstream firms outside the buyer group. This impact critically depends on whether or not the buyer group and the supplier can write a contract contingent on the market price paid by outsiders. With contingent contracts, the price paid by firms outside the buyer group rises and their profits fall. If such contracts are infeasible, possibly due to legal concerns, the market price is lower after the buyer group forms. These results raise issues for antitrust authorities in Australia, Europe, the USA and elsewhere who evaluate buyer-group agreements. We extend the model to consider the situation where a supplier can commit in advance to the market price. In this situation, the bargaining power of the buyer group becomes relevant with the market price inversely related to this bargaining power. We illustrate our results with a simple example.