On Vertical Market Structure And Buyer Countervailing Power

For a long time, there has been a popular belief that there are only two ways to treat monopoly, one is regulatory policy, the other is competition or antitrust policy. Buyer countervailing power hypothesis proposed by Galbraith in 1952 has in fact raised a very genius question, i.e. except of regulation and competition policy, can buyer power be the third way to treat monopoly? The opinions of scholars diverge from each other on this issue. Some economists applaud buyer countervailing power hypothesis, demonstrate that under certain conditions, buyer power is the third way to treat monopoly, large-scale retailers really act as the agents of each consumer, and bring the Gospel to them. Other economists have proved that under certain conditions, the rise of buyer power is a disaster for consumers.The dissertation redefines different types of vertical market structure, such as double monopoly, bilateral monopoly, and two-sided monopoly, and in accordance with tradition sets industrial background as the retail industry. On this base, the core issue of the dissertation can be restated as follows:When there is bilateral monopoly, what are the differences between two-sided monopoly and one-sided monopoly as far as welfare consequences of retailers' rising buyer power are concerned, and how to provide antitrust analysis of subsequently restrictive practices.At the beginning, this dissertation analyzes the topic selection, core issue, research approach, innovative points, and main methods. The part of literature review begins with a brief survey on the origin of buyer countervailing power hypothesis, and its early debates, then focus on some critical breakthroughs in recent decades, including game theoretic findings, empirical and experimental findings, and antitrust policy developments. China-situated researches are briefly commented.Theoretical research has two parts, including price competition model and differentiated services model. In price competition model, game behaviors between retailers and suppliers in different kinds of setting, such as two-sided monopoly, one-sided monopoly, and dynamic optimization. The results are numerically computed by matlab software, compares with classical models and finds a number of completely opposite conclusions. The theoretical Frame of Reference is set to vertical market structure with three characteristics: double monopoly, bilateral monopoly and two-sided monopoly, and then extends the research to one-sided monopoly situation, concerning with the comparisons between two-sided monopoly and one-sided monopoly, static optimization and dynamic optimization respectively. In tow-sided monopoly situation, from consumer welfare perspective, the results of vertical integration are better than the results of vertical separation, whereas in one-sided monopoly situation, the results of vertical separation are better than the results of vertical integration, so the vertical market structure of one-sided monopoly or one-sided competition effectively overcomes double marginalization problem, to counter the forces at this time the buyer countervailing power hypothesis is somewhat reasonable. Taking Inter-period factor into account, this conclusion is even more credible.There are two limitations in price competition Model:First, only consider the price factor (price and output are two sides of the same coin), neglecting non-price factors (such as the distribution of shop location, convenience, business area, business atmosphere, marketing services, advertising, etc.); Second, there is loss of generality when only one retailer and two retailers situations are taking into account respectively.Differentiated services model firstly introduces the factor of differentiated retailer services and deems differentiated service is a broad concept, including the distribution of shop location, convenience, business area, and many other non-price factors. Secondly, the assumption of the number of retailers is further relaxed, considering in supplier monopoly situation the impact of change in retailers number (from 1 to N) on the consumer welfare, which is represented by final price. The results show that, in two-sided competition situation, when the degree of retailer services differentiation is very high, then the higher the retailer concentration, the lower the consumer prices, but retailer number should not be less than at least two. Social welfare of duopoly retail market structure is superior to a lower concentrated market in such situation. However, in one-sided monopoly situation, the lower the retailer concentration, the lower the consumers prices, so the retailer concentration is not beneficial to consumer welfare.Theoretical research part has strong policy implications. As far as merger control policy is concerned, if vertical market structure is characterized by upstream sellers with high degree of monopoly power and two-sided competition in retail level, then only when retail services are highly substitutable, it is beneficial to social welfare to allow (even encourage) downstream market concentration, which means that, in this situation the most ideal market structure is two (symmetrically) independent retailers competing on price. This result clearly supports buyer countervailing power hypothesis proposed by Galbraith. However, when retail services are not highly substitutable or even weakly substitutable, the higher the retail concentration, the higher the final consumer price and the lower the degree of service variety, so it is detrimental to social welfare. Therefore, the implementation of lenient merger control policy needs for extremely harsh preconditions. If vertical market structure is characterized by upstream sellers with high degree of monopoly power and retailers with high degree of buyer power and seller power, then regardless the degree of retailer services differentiation, as long as retailer mergers just further enhance their buyer power, and will not significantly affect their seller competition structure, it will be beneficial to consumer welfare in this situation. Taking into account the realities of economic life, nationwide large chain stores procure as one firm with strong buyer power, but in each regional (urban) market face intense competition from so many local retailers, in this situation retailer's concentration to form large chain retailers will probably be beneficial to consumer welfare.China's antimonopoly law has been launched. But it is worth noting that, in the process of discussion about China's antimonopoly legislation and enforcement, there is no distinguish between seller's power and buyer's power, China's antimonopoly law and the subsequent relevant legal provisions and legal explanations don't have clear terms for buyer power, apparently this policy approach is somewhat inappropriate. In fact, many Chinese industries, such as retail, coal & electricity, drugs, oil, telecommunications, steel, automobiles, agricultural products distribution, military procurement etc., all exist in some degree buyer power, some industries have even severe issues, for example, conflicts between suppliers and retailers.Empirical research part of the dissertation for the first time conducts an empirical analysis on buyer countervailing power issue in China's situation. Considering market concentration, vertical competition relationship, market openness, social influence and other factors, the dissertation chooses Chinese retail industry as a research object, and uses multiple linear regression model to test the causal relationship between buyer countervailing power in food retail industry and retail price index. The study shows that since 1999 to 2007 buyer power in China's food retail industry has been declining, this phenomenon may be caused by relative increase of average scale of food manufacturing firms, also may be caused by relative decrease of average scale of food retailing firms, or both types of factors. But there is a negative correlation between changes of buyer countervailing power and changes of food retail price, which is highly consistent with buyer countervailing power hypothesis. Therefore, changes of vertical market structure of China's retail industry in recent years don't help retail price to go down. Taking into account the needs to improve market competition and consumer welfare, from the most general sense, the antimonopoly authorities should encourage further concentration of food retail industry, whereas take a relatively more stringent merger control policy in food manufacturing industry.Policy research part of the dissertation mainly includes three aspects:First, from the general perspective to discuss the economic foundations of antimonopoly law; Second, as far as antimonopoly issues of buyer's vertical restraints behavior are concerned, which are typically exercised by dominant retailers, a three-stage economic analysis framework called 'motivations→conditions→effects' is proposed; Third, as far as antimonopoly issues of slotting allowances are concerned, a 'eight-step identification method' is proposed, including market definition, market structure, market power, behavior identification, profitability level, competition effects, welfare effects, and efficiency defense and so on.Of course, both from theoretical or empirical perspective, the research on buyer power needs for future research. The final chapter of the dissertation brings forward some interesting issues worthy of further research, such as'learning consumer','water-bed effects', the upstream product innovation incentives, as well as empirical study on pharmaceutical retail industry, shipbuilding industry and dairy industry etc..