Buyers’ Miscoordination, Entry and Downstream Competition

Abstract

This article shows that buyers' coordination failures might prevent entry in an industry with an incumbent firm and a more efficient potential entrant. If there were a single buyer, or if all buyers formed a central purchasing agency, coordination failures would be avoided and efficient entry would always occur. More generally, exclusion is less likely the lower the number of buyers. For any given number of buyers, exclusion is less likely the more fiercely buyers compete in the downstream market. First, intense competition may prevent miscoordination equilibria from arising; second, in cases where miscoordination equilibria still exist, it lowers the maximum price that the incumbent can sustain at such exclusionary equilibria. Buyers have experienced increased concentration in many sectors, in particular grocery retailing.1'2 This trend has triggered a wide debate on the effects of buyer power.3 We contribute to this debate by studying how concentration and competition among buyers affect the possibility of entry by a new upstream supplier in an industry characterised by scale economies. In our model, buyers' fragmentation may lead to a situation where a new upstream firm does not manage to enter a market, although endowed with lower marginal costs than an incumbent firm. When several buyers decide independently from which supplier to purchase, miscoordination equilibria may arise where all buyers buy from the incumbent even if the entrant sets a lower price: if all buyers address the incumbent, none of them has an incentive to deviate (that is, to switch to the entrant), anticipating that a single order would not allow the