Vertical Bargaining and Retail Competition: What Drives Countervailing Power? Germain Gaudin (DICE, Heinrich Heine University Düsseldorf) Discussant: Hugo Molina (INRA & École polytechnique) July 2016 Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 1 / 5
Summary Pass-through rate as a Countervailing buyer power. Main questions: When does a retail merger generate countervailing power effects? (from the pass-through rate) When does it exhibit pro-consumer effects? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 2 / 5
Summary Pass-through rate as a Countervailing buyer power. Main questions: When does a retail merger generate countervailing power effects? (from the pass-through rate) When does it exhibit pro-consumer effects? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 2 / 5
Summary Pass-through rate as a Countervailing buyer power. Main questions: When does a retail merger generate countervailing power effects? (from the pass-through rate) When does it exhibit pro-consumer effects? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 2 / 5
Summary Pass-through rate as a Countervailing buyer power. Main questions: When does a retail merger generate countervailing power effects? (from the pass-through rate) When does it exhibit pro-consumer effects? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 2 / 5
Main Ingredients Bargaining à la Nash-in-Nash: delegated negotiator structure with passive-beliefs and binding contracts. Linear wholesale tariffs. Retailers commit to purchase quantities. No assumption about the nature of the downstream competition (Bertrand vs Cournot). General demand systems. Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 3 / 5
Main Ingredients Bargaining à la Nash-in-Nash: delegated negotiator structure with passive-beliefs and binding contracts. Linear wholesale tariffs. Retailers commit to purchase quantities. No assumption about the nature of the downstream competition (Bertrand vs Cournot). General demand systems. Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 3 / 5
Main Ingredients Bargaining à la Nash-in-Nash: delegated negotiator structure with passive-beliefs and binding contracts. Linear wholesale tariffs. Retailers commit to purchase quantities. No assumption about the nature of the downstream competition (Bertrand vs Cournot). General demand systems. Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 3 / 5
Main Ingredients Bargaining à la Nash-in-Nash: delegated negotiator structure with passive-beliefs and binding contracts. Linear wholesale tariffs. Retailers commit to purchase quantities. No assumption about the nature of the downstream competition (Bertrand vs Cournot). General demand systems. Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 3 / 5
Main Ingredients Bargaining à la Nash-in-Nash: delegated negotiator structure with passive-beliefs and binding contracts. Linear wholesale tariffs. Retailers commit to purchase quantities. No assumption about the nature of the downstream competition (Bertrand vs Cournot). General demand systems. Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 3 / 5
Baseline model & Main results Baseline model: Extreme distribution of bargaining weights (i.e. take-it-or-leave-it offers). Retailers have no status quo payoffs. A retail merger generates countervailing buyer power effects when the market exhibits an increasing pass-through rate (i.e. w ( p w ) > 0). Pro-consumer effects occur when the marginal revenue is upward slopping (i.e. demand is highly convex). Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 4 / 5
Baseline model & Main results Baseline model: Extreme distribution of bargaining weights (i.e. take-it-or-leave-it offers). Retailers have no status quo payoffs. A retail merger generates countervailing buyer power effects when the market exhibits an increasing pass-through rate (i.e. w ( p w ) > 0). Pro-consumer effects occur when the marginal revenue is upward slopping (i.e. demand is highly convex). Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 4 / 5
Baseline model & Main results Baseline model: Extreme distribution of bargaining weights (i.e. take-it-or-leave-it offers). Retailers have no status quo payoffs. A retail merger generates countervailing buyer power effects when the market exhibits an increasing pass-through rate (i.e. w ( p w ) > 0). Pro-consumer effects occur when the marginal revenue is upward slopping (i.e. demand is highly convex). Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 4 / 5
Baseline model & Main results Baseline model: Extreme distribution of bargaining weights (i.e. take-it-or-leave-it offers). Retailers have no status quo payoffs. A retail merger generates countervailing buyer power effects when the market exhibits an increasing pass-through rate (i.e. w ( p w ) > 0). Pro-consumer effects occur when the marginal revenue is upward slopping (i.e. demand is highly convex). Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 4 / 5
Baseline model & Main results Baseline model: Extreme distribution of bargaining weights (i.e. take-it-or-leave-it offers). Retailers have no status quo payoffs. A retail merger generates countervailing buyer power effects when the market exhibits an increasing pass-through rate (i.e. w ( p w ) > 0). Pro-consumer effects occur when the marginal revenue is upward slopping (i.e. demand is highly convex). Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 4 / 5
Discussion Quantity commitment assumption. Disagreement payoffs effects: A merger between 2 single-product retailers decreases manufacturer s status quo payoffs. What about the countervailing power? The pro-consumer effects? Baseline model: To obtain pro-consumer effects the demand must be highly convex. What does this mean in term of consumer utility (i.e. microfoundations)? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 5 / 5
Discussion Quantity commitment assumption. Disagreement payoffs effects: A merger between 2 single-product retailers decreases manufacturer s status quo payoffs. What about the countervailing power? The pro-consumer effects? Baseline model: To obtain pro-consumer effects the demand must be highly convex. What does this mean in term of consumer utility (i.e. microfoundations)? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 5 / 5
Discussion Quantity commitment assumption. Disagreement payoffs effects: A merger between 2 single-product retailers decreases manufacturer s status quo payoffs. What about the countervailing power? The pro-consumer effects? Baseline model: To obtain pro-consumer effects the demand must be highly convex. What does this mean in term of consumer utility (i.e. microfoundations)? Gaudin (2015) Vertical Bargaining and Retail Competition: What Drives Countervailing Power? 5 / 5