Buyer countervailing power: a survey of the theory and experimental evidence

The rise of mega-retailers and industry concentration levels has recently generated an interest among economists and antitrust policymakers in the effects of buyer countervailing power. There exists a considerable theoretical literature offering a range of sources of powerful buyers' ability to extract price discounts. The explanations that have been tested experimentally have all found laboratory support. This chapter surveys the theoretical literature on countervailing power, emphasizing experimental tests where available. The increasing policy relevance of this topic and the blossoming of theoretical models contrasted with the dearth of experimental tests point to fruitful directions for research. Introduction The industrial organization literature has traditionally focused exclusively on seller strategies. Buyers are typically assumed to act as passive price-takers, accepting all sellers' prices below their demand curves. While this assumption may accurately describe the individual consumer's purchasing decision, non-retail sales account for one-third of the gross domestic product. In industrial-product, wholesale and intermediate-product markets, a small number of sellers typically compete with one another for the business of a small number of large buyers. In such settings, there is no theoretical or even intuitive reason to believe that buyers should be any less influential in establishing the price than sellers. Galbraith (1952) first introduced the notion of buyer countervailing power. Galbraith contended that powerful buyers constitute an active restraint to monopoly power.