Buyer Groups as Strategic Commitments

Abstract

Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. Most theoretical and empirical work on buyer groups has emphasized that buyer size can increase buyer surplus. In contrast, I argue that even an arbitrarily small buyer group that is composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from a single seller. When there are two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium, though many other equilibria exist including equilibria with ar- bitrarily many buyer groups. When there are n > 2 sellers, a coalition-proof subgame perfect equilibrium always exists, but the grand coalition is not an equilibrium. In the absence of transfer payments, all coalition-proof equilibria have a minimum of n(n − 1)/2 buyer groups, one for each pair of firms. With transfer payments, three sellers, and buyers have symmetric preferences, all coalition-proof equilibria are payoff equivalent and have a minimum of three buyer groups, one group for each pair of sellers.