Abstract
The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream. This paper presents a model in which upstream price concessions leads to lower downstream prices. In this model, the countervailing power of a large retail chain store enables the firm to play one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. To the extent that the chain’s countervailing power stems from its multi-market operations, and local retail markets remain competitive, the chain’s countervailing power translates into lower retail prices. In fact the retail-price-restraining effect of the chain is greater than the effect produced when upstream competition is enhanced by the entry of an additional seller.
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