The Study On Formation Of Buyer Countervailing Power Under The Condition Of Outside Option

This paper builds the model of formation of the buyer countervailing power under outside option. There are two forms of external options, including outside option cased by potential entrant and outside option cased by alternatives. This paper examines the formation and effects of buyer countervailing power under two conditions.In the case of potential entrant, the formation of the buyer countervailing power depends primarily on the differences of marginal cost between upstream potential entrants and incumbent supplier. If and only if the cost of a potential entrant is lower than that of incumbent supplier, the buyer countervailing power will appear, and it will be negative with the entrant’s cost. Under this case, the results show that the buyer countervailing power always reduces the market retail price. On wholesale price, there is some extent of the "waterbed effect" of the buyer countervailing power:as the buyer countervailing power always reduces wholesale prices itself, wholesale prices always increase for other retailers. The effects of the buyer countervailing power on demands of the market are similar:the buyer countervailing power makes its own market demand increase, making each other’s market demand decrease. The final impacts of buyer power are:the buyer countervailing power increases their own retail profits, making other retailers’ profits lower.By means of simulation, we found that the effects of buyer countervailing power on consumer welfare is positive in general, but the impact on producer surplus is uncertain:within a certain range, the buyer countervailing power makes the producer surplus increase, but buyer countervailing power decline the producer surplus more time. However, the decrease in the producer surplus did not offset the increased of consumer surplus significantly. As a result, the impact of buyer countervailing power on the social welfare is positive.This article also discusses the situation outside option forms buyer power, with alternatives as a source of outside option. Under the conditions of alternatives, the formation of the buyer countervailing power depends on the degree of substitutability of two commodities. In general, the stronger degree of substitution of two goods, the lower buyer countervailing power of downstream retailers. This dissertation also focus on the effect of buyer countervailing power to retailers’ wholesale prices, retail prices, market demand, profits of upstream and downstream, consumer welfare and social welfare. The results show that when retailers have outside option, the buyer countervailing power is always to reduce the wholesale price and final retail price. In market demand aspect, the buyer countervailing power increased market demand itself, making the market demands of rival decreases. Ultimately, the buyer countervailing power increase retailer’ profits itself, making rival retailers lower profits. For upstream suppliers, when retailer has outside option caused by the mutual alternatives, the upstream supplier’s profits show a downward trend. In social welfare aspect, the buyer countervailing power increases consumer and producer surplus. The overall impact of the final buyer countervailing power on the impact of social welfare is also positive.