Vertical Bargaining and Retail Competition : What Drives Countervailing Power?

This paper investigates the effects of changes in retail market concentration when input prices are negotiated. Results are derived from a model of bilateral Nash-bargaining between upstream and downstream firms which allows for general forms of demand and retail competition. Whether countervailing buyer power arises, in the form of lower negotiated prices following greater concentration downstream, depends on the pass-through rate of input prices to retail prices. Countervailing buyer power arises in equilibrium for a broad class of demand forms, and its magnitude depends on the degree of product differentiation. However, it generally does not translate into lower retail prices because of heightened market power at the retail level. The demand systems commonly used in the literature impose strong restrictions on the results