Buyer Alliances in Vertically Related Markets

Abstract

Supplement is available at: https://ssrn.com/abstract=3452506 Alliances of buyers to negotiate input prices with suppliers have become commonplace in many industries. Using pre- and post-alliances data on household purchases of bottled water, I develop a structural model of bilateral oligopoly to estimate the effects of buyer alliances formed by retailers on the bargaining power of firms and retail prices paid by consumers. Results provide evidence of a countervailing buyer power effect that reduces retail prices by roughly 7%. Exploring determinants of buyer power, I find that changes in firms’ bargaining ability play an important role in the countervailing force exerted by buyer alliances which, absent this effect, may harm retailers.