Economics of Buyer Power Identification

1
Economics of Buyer PowerIdentification
Characterization

• C. Robert Taylor
• Auburn University
• taylocr_at_auburn.edu

2
Conditions Required for Competitive Athletic
Events(Similar for Competitive Markets)

• Approximate balance of power (talent) in opposing
  teams
• League parity scholarship limits limits on
  recruiting
• Appropriate and well defined rules of the game
• Too few rules the game may turn into a brawl
• Too many rules the refs take over and the
  athletes do not get to play
• Impartial enforcement of the rules

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Identification Characterization of Buyer Power

• Type I Imbalance in power
• Relative size and bargaining power
• arms-length transactions occur only if buyer and
  seller have approximately the same power
• Asymmetric information
• One team cannot have the other teams playbook
• Sharing of information among buyers
• Barriers to exit of suppliers
• Buyer control of entry/exit of suppliers
• Can the weaker side organize to develop
  countervailing power (player union)

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Identification Characterization of Buyer Power

• Type II Actions that distort or fix the rules
  of the game or otherwise give an unfair
  advantage
• Lack of transparency of the rules
• Deception of sellers
• Deception of rule-makers
• Lying to Congress
• Good faith fair dealing
• Collusion in litigation
• Collusion in lobbying Congress
• Long-run effects may be worse than classical
  price-fixing

5
Meat Poultry Promotion Coalition May 23,
2007 Dear Mr. Chairman (House Agriculture
Subcommittee on Livestock, Dairy, and Poultry)
On behalf of the Meat and Poultry Promotion
Coalition, representing a vast majority of the
livestock, poultry, and meat producers in the
U.S., . (opposition to H.R. 2135--Competitive
and Fair Agricultural Markets Act of
2007)Sincerely,

• National Meat Association
• National Pork Producers Council
• National Turkey Federation
• Seaboard Corporation
• Smithfield Foods Swift Co.
• Tyson Foods, Inc.
• U.S. Premium Beef

• American Meat Institute
• Cargill
• Christensen Farms
• Hatfield Quality Meats
• Hormel
• National Beef
• National Chicken Council

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Identification Characterization of Buyer Power

• Type III Actions that distort refereeing of the
  game
• Agency capture (DOJ, FTC, USDA, FDA ?)
• Organization capture (buyer captures sellers
  organization or union)
• Influence on the Judiciary
• Incompetent or corrupt referees
• Placing referees (competition investigators)
  under cubicle arrest!

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Overview of Traditional Economics

• Monopsony (single Buyer)
• Monopsony and monopoly are (almost) mirror images
• Aggregate economic outcome
• Sub-competitive price to sellers
• Buyer captures sellers profit
• Sub-competitive quantity therefore harm to
  consumers
• Aggregate economic inefficiency
• Conclusions dependent on the same cost structure
  in monopsony as with competitive buyers
  (questionable assumption)
• All-or-Nothing Monopsony (buyer dictates price
  and quantity)
• Aggregate economic outcome
• Aggregate economic efficiency no consumer harm
• Buyer extracts all profit from sellers (unfair)

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Overview of Traditional Economics

• Oligopsony (few buyers)
• Hundreds of models, simple to sophisticated game
  theory models
• Differ in assumptions about how one buyer reacts
  to price, quantity, and quality changes by other
  buyers
• Cournot (quantity)
• Bertrand (price competition)
• Stackleberg leader-follower (Cournot follower)
• Contestability (ease of entry/exit)
• Aggregate Efficiency and Fairness implications of
  economic models of imperfect competition are very
  sensitive to assumptions

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Metrics of Market Power

• Lerner Index (price equals marginal cost)
• measures a firms ability to maintain prices
  above competitive levels
• Data typically unavailable to public or may not
  be available at all
• Inaccurate measure under some assumptions
• Market Share of largest (x) firms (CRx)
• HHI Index (sum of squares of market shares)
• Derived from the Cournot duopoly model
• assumes that firm A does not change its quantity
  in reaction to a change in quantity by other
  firms (questionable assumption for large firms)

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Identification Characterization of Buyer Power

• Type I Imbalance in power
• Type II Actions that distort or fix the rules
  of the game to give an unfair advantage
• Type III Actions that distort refereeing of the
  game
• In identifying and characterizing buyer
  power (and seller power) we need to move beyond
  traditional economics--industries in concentrated
  markets have!