Buyer Power: Economic Theory and Antitrust Policy

• DOI: https://doi.org/10.1016/S0193-5895(06)22002-5
• Pages: 17-40
• Published date: 06 April 2007
• Date: 06 April 2007
• Author: Zhiqi Chen

BUYER POWER: ECONOMIC

THEORY AND ANTITRUST POLICY

Zhiqi Chen

ABSTRACT

The objective of this paper is to survey the recent developments in eco-

nomic theories of buyer power and using the theories as a guide to discuss

how antitrust cases involving buyer power can be analysed. An important

conclusion that emerges from this survey is that the competition effects of

buyer power are quite different depending on whether it is monopsony

power against powerless suppliers or countervailing buyer power against

large suppliers with market power. A proposed framework of antitrust

analysis is presented, and issues related to market definitions and deter-

mination of buyer power are discussed.

1. INTRODUCTION

The increased concentration of retail industry in Europe and the tremendous

success of big-box retailers such as Wal-Mart, Home Depot, and Staples in

North America and around the world have enhanced the interest in antitrust

policy issues regarding buyer power in recent years. Antitrust authorities in

Europe and North America appear to be increasingly concerned about the

policy implications of rising buyer power. For example, both the OECD and

Research in Law and Economics, Volume 22, 17–40

Copyright r2007 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 0193-5895/doi:10.1016/S0193-5895(06)22002-5

17

the European Commission conducted studies to examine the impact of

buyer power on competition (OECD, 1998;European Commission, 1999).

In the United States, the Federal Trade Commission held a public workshop

in 2000 to discuss enforcement policy regarding slotting allowances, a major

buyer power issue in grocery retailing.

1

A more recent indication of en-

hanced interest in buyer power in the antitrust community is the publication

of a symposium on this subject in the Antitrust Law Journal in 2005.

The objective of this paper is to survey the recent developments in eco-

nomic theories of buyer power and using the theories as a guide to discuss

how antitrust cases involving buyer power can be analysed. Section 2 is

a review of the theoretical literature on buyer power. An important con-

clusion that emerges from this survey is that the competition effects of buyer

power are quite different depending on whether it is monopsony power

against powerless suppliers or countervailing buyer power against large

suppliers with market power. These differences can be seen from their

differential effects on economic efficiency as well as from the different con-

sequences of their interactions with downstream competition and pricing

schemes. In addition, theories of buyer group are also reviewed.

Section 3 is a discussion of the antitrust analysis of buyer power. Three

analytical issues are discussed: market definition, determination of buyer

power, and assessment of anticompetitive effects. On market definition, it is

pointed out that buyer power cases often involve two levels of markets.

While the definition of downstream markets can be carried out in the con-

ventional way, the definition of upstream markets should focus on seller side

substitutability rather than buyer side substitutability. Consequently, the

relevant upstream markets are not necessarily aligned with the relevant

downstream markets. In other words, the set of competitors on the buyer

side of the upstream markets may not be the same as the set of competitors

on the seller side of the downstream markets.

This last point is especially important in the determination of buyer

power. In practice, a useful indicator of buyer power is a buyer’s market

share, i.e. the buyer’s share of purchases in the suppliers’ total sales in the

relevant upstream market. The above discussion suggests that when calcu-

lating the buyer’s share of purchase, one should include in the denominator

sales to all buyers in the relevant upstream market, not just those buyers

who compete with this particular buyer in the relevant downstream market.

For the assessment of possible anticompetitive effects in buyer power

cases, I propose an analytical framework that is grounded in economic

theories, in particular the recent theoretical developments. The framework

uses a classification scheme based on the state of competition in both

ZHIQI CHEN18