Study On The Sources And Welfare Effects Of Market Power Of Retailers And Suppliers

With surplus goods and rapid development in retailing, buyer power of retailers appears and grows gradually. While some suppliers still in leading position in their industry have some market power, they bargain with large retailers. The welfare effects remain inconclusive.This paper firstly introduces the changing process of the relation between retailers and suppliers, then illustrates the effect on wholesale price caused by the emergence of market power of both sides(leading to that change) with the use of Nash bargaining model, secondly discusses the sources of market power of both sides, and lastly finds out the effects on consumers'and total social welfare caused by the change.The change of the relation includes three stages:leading by suppliers, leading by retailers, and collaborative negotiation. The formation of last stage is due to mutual economic dependence caused by the market power of both sides. Analysis with Nash bargaining model shows that the more significant buyer power of retailers is, the more favorable position retailers will have when negotiating with suppliers, and the lower wholesale prices will be. Otherwise the wholesale price will be higher.Sources of buyer power include four aspects:the seller power of retailers, entry barriers in retailing, intense competition among suppliers and economic dependence on retailers. Among the four aspects, the seller power of retailers is the key one. Entry barriers in retailing contain own brands, economices of scale and scope, and sunk costs. The proliferation of new products and the increase in numbers of suppliers lead to intense competition among suppliers. Excessive economic dependence on retailers results in the chang of position between retailers and suppliers.Sources of suppliers' market power include strong market share, cost advantages and brand advantages. Strong market share is the main reason for the formation of the suppliers'market power.Economies of scale makes products have cost advantages.Suppliers promote the formation and consolidation of market power with brand building and segmentation. This paper argues that the welfare effect of buyer power is better than that of seller power, and the emergence of retailers' buyer power is not a bad thing. Although it doesn't cover the lossese caused by monopoly, it helps solve the problem of double marginal ization, and reduce or offset the effect on consumers' and total social welfare caused by suppliers'seller power.Though buyer power squeezes a certain degree of the profits of small and medium suppliers, it allows suppliers to actively improve the production technology to lower production costs and inhance their own brand building, and it helps suppliers to raise efficiency. Retailers with buyer power can limit the abuse of suppliers' market power, so the emergence of buyer power should not be prohibited. But when retailers have total seller power, they will not have incentive to drive down wholesale prices. At this time if there exists some competition among retailers as sellers, it can effectively inhibit the occurrence of collusion to promote welfare. Therefore, if the retailer's M & A activity does not reduce competition in the local market, mergers and acquisitions do not need to be banned on.