Small Buyers

Abstract

We develop a model of retail competition and negotiations with an upstream supplier for several firms of different sizes. Contrary to existing thinking, we demonstrate that the larger a buyer the less countervailing power he possesses over the supplier. The reason for this is that a buyer's outside option - the ability to integrate backwards - becomes proportionately weaker as he grows in size as self-production is characterised by diseconomies of scale. This result emphasises that any analysis of countervailing power must go beyond a simple examination of a buyer's size, and must instead fully investigate the relative bargaining positions of suppliers and buyers.