Buyers: balancing their power?

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Buyers balancing their power?

• Prepared for British Brands Group
• Helen Jenkins, Managing Director

May 22nd 2009
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What is buyer power?

• useful to differentiate between buyer market
  power and countervailing buyer power
• balance buyer power can lead to lower input
  prices
• if downstream is competitive, the lower price is
  passed on to consumers welfare is enhanced
• lower input price, but at what cost?

the ability to affect (lower) the price of inputs
by restricting amount purchased inverse of
supplier market power arises from lack of
competitive pressures on the buyer individually
negotiated discounts
Buyer market power
ability to bargain with strong upstream
supplier arises from the buyer placing a
competitive constraint on the upstream
supplier enhanced by the buyers ability to enter
the upstream market or sponsor entry by a third
party
Countervailing buyer power
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Harmful buyer power impact on the upstream

• use of dominant position (monopsony or cartel
  cases) to extract large discounts
• can lead to eventual exit of suppliers
• long-term incentives to invest and innovate
• extraction of large discounts dampens the
  incentives for investment
• Inderst (2007) incentives to innovate may
  increase to gain bargaining power in negotiations
  with a large buyer
• product range can decrease as result of a
  downstream merger if merging parties decide to
  single-source
• greater competition between suppliers due to
  smaller product differentiation
• less choice for consumer

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Harmful buyer power impact on the downstream

• exclusionary behaviour to reduce competition
  downstream
• exclusive agreements between larger retailers and
  suppliers
• raising costs of rivals
• waterbed effect
• suppliers are forced to charge smaller retailers
  higher prices to compensate for supplying larger
  retailers at lower prices
• can lead to exit of retailers from the market
• unintended consequence

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UK groceries inquiry

• reduction in number of smaller retailers was one
  of the OFTs reasons for referral of the study to
  the CC
• is there waterbed effect?
• the CC found that the assumptions behind the
  waterbed effect model did not apply to the UK
  market for groceries
• no evidence was found to support the waterbed
  effect
• other findings
• buyer power might be offset by supplier power on
  most prominent goods
• financial viability of suppliers is not under
  threat
• no evidence of decline in investment and
  innovation
• no barriers to entry and expansion for smaller
  suppliers

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Assessment of buyer market power

• applying standard market power concepts to buyers
• concentration measures
• number of buyers, buyer concentration ratio, HHI
• market definition is important (eg, treatment of
  self-supply)
• elasticity of supply
• inverse relationship between elasticity and buyer
  power
• performance measures price-cost margin
• the margin depends on all stages of operations
  not just market power in upstream
• in groceries inquiry the CC examined the size of
  retailers relative to suppliers retailers'
  margins share of retail price earned by
  retailers in the supply chain.

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Countervailing buyer power

• seen as positive by competition authorities
• use of countervailing buyer power argument to
  clear mergers

Deans/ Stonegate Eggs Direct competitors, c. 60
market share
Cott/Macaw Own brand soft drinks Direct
competitors, c. 70 market share
Heinz/HP Branded red and brown sauces Limited
overlap
Cleared
Cleared
Divested
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Implications for analysis

• buyer power cannot be assumed good or bad per se
• rule of reason test is applied
• short- and long-term effects must be considered
• implications for innovation and investment are
  possible
• assessement of buyer power
• few accepted measures are available

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www.oxera.com

• Contact
• Helen Jenkins
• 44 (0) 1865 253 016helen.jenkins_at_oxera.com