Buyer-Size Discounts and Inflation Dynamics

This paper considers the macroeconomic effects of retailers' market concentration and buyer-size discounts on inflation dynamics. During Japan's “lost decades,” large retailers enhanced their market power, leading to increased exploitation of buyer-size discounts in procuring goods. We incorporate this effect into an otherwise standard New- Keynesian model. Calibrating to the Japanese economy during the lost decades, we find that despite a reduction in procurement cost, strengthened buyer-size discounts did not cause deflation; rather, they caused inflation of 0.1% annually. This arose from an increase in the real wage due to the expansion of production