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" Buyer power : "
Mazzarotto, Nicola.
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Latin Dissertation
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| Record Number
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1096347
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TLets437833
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| Main Entry
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Mazzarotto, Nicola.
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| Title & Author
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Buyer power :\ Mazzarotto, Nicola.
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| College
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University of East Anglia
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| Date
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2005
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| student score
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2005
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| Degree
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Ph.D.
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| Abstract
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The main international antitrust institutions within the last ten years have alldevoted significant resources to solving one particular problem. The problem of how totreat antitrust cases, and in particular merger cases, that involved firms operating in theretail sector has been considered in Britain by the Office of Fair Trading and theCompetition Commission, in the US by the Federal Trade Commission, by theDirectorate General Competition (DGComp) in the European Union, and finally, in anattempt to compare and coordinate international approaches, by the OECD. At the sametime, independent academic research had also started to devote more attention to theeconomic theory that could be employed to analyse the retail sector.An important factor behind this relatively sudden growth of interest in theeconomics of the retail sector has been the sharp rise in concentration that the food retailsector in particular has experienced in most western economies during the past 20 yearsor so. The change in concentration was accompanied by a change in consumers'shopping habits and has brought about a change in business practices, in particular inretailers' relations with suppliers.This is not a change that has taken place everywhere. Concentration indexes varysubstantially across European states. Great Britain is one of those markets where theretail sector is relatively mature with retail chains dominating the marketplace at thenational level. At the other end of the spectrum lie countries such as Spain, Greece, and5Nicola Mazzarotto © 2005Italy where concentration is still relatively low and consumers' shopping habits appearto still be quite traditional.Changes in business relations have, in some cases, been met by organized politicalresponses. In both France and the UK, farmers' associations have complained stronglyof an alleged monopolistic power that national retail chains exploited to impose unfaircontract terms upon their members. In the UK, consumers associations organised the"rip off Britain" campaign with the aim of tackling the supposed monopolistic origin ofinternational price differentials.For most antitrust authorities in the second half of the 1990s the need was urgent tofind a framework within which to analyse mergers between retail chains in marketswhere concentration was already high. These mergers involved issues that were notmuch treated by economic theory, such as the role of specific contractual clausesimposed by retailers on their suppliers or, more generally, the implications of "buyerpower". Buyer power can be thought of, broadly speaking, as the market power thatretailers enjoy vis-ä-vis their suppliers, for competition. Despite being used in differentcontexts, however, this term does not always carry the same meaning. The first chapterdiscusses the use of this term by antitrust authorities, before reviewing the most relevanttheoretical literature that has addressed the issue of buyer power in recent years.In 1999, following a first wave of independent as well as commissioned theoreticalresearch, the European Commission's DGComp was given the opportunity ofemploying it by the notification of a merger between two major Austrian supermarketchains: Rewe-Billa and Meinl. Chapter 2 analyses the principles of this decision' indetail. This chapter also argues that the principles established in this decision arerepresentative of the Commission's "approach" as they were subsequently utilised toassess other mergers in food retailing as well as in other retail sectors.This Decision represents, in my view, an opportunity for two main reasons. First, itallows us to clearly identify the principles upon which the Commission, more or lessexplicitly, judges a retail merger to be anticompetitive and allows us to check whetherthese principles are supported by economic theory. Second, it allows us to identifywhere policy implementation could benefit from further developments in economictheory.Chapter 2 is motivated by these two ideas. It highlights areas where theCommission's approach seems weak. These are mainly in the field of market definition,' Decision1 999/674/EC- Rewe/Mein(lO J L 274/1,23/10/1999).at various stages of the supply chain, and in its use of the theory on buyer power. Thesethemes then inform the theoretical work in the subsequent chapters.The third chapter focuses on market definition, analysing the Commission'spractice by reference to a simple stage-game model of bargaining between a singlemanufacturer and several retailers. The results show that the Commission's approach tomarket definition at the procurement level, i. e. where retailers act as buyers frommanufacturers, can give misleading results in the competitive assessment of the mergerif the assumption that the Commission makes on the origin of buyer power is violated.This assumption states that buyer power originates from the size of the orders that abuyer can place In simple terms: the larger buyer pays the lower price. In the secondchapter an alternative view is put forward, which stresses the importance of competitiveconditions in differentiated markets. If retailers are asymmetric in that they sell indistribution markets that differ for their degree of seller market power, and theirbargaining power vis-a-vis suppliers is linked to those competitive conditions, then theCommission's approach may not capture buyers' dominance in the intermediate marketand may give misleading indications. This chapter then suggests some changes to theCommission's practice of defining procurement markets that could address the currentshortcomings.The fourth chapter extends the model of chapter 3 to look at retailers' procurementstrategies. In the Rewe/Meinl decision it was reported that Rewe did not coordinate thepurchases of its international subsidiaries when buying from large internationalproducers. This is a puzzling fact when one thinks that buyer power is directly related tobuyer's size. However, chapter 4 shows that if buyer power is determined bycompetitive conditions in the distribution markets, then not to coordinate internationalpurchases can be a profit maximising strategy.The fifth chapter addressesth e issue of the origin of buyer power formally and in amore general setting. In the model retailers compete for final consumers around a circleand bargain with a single monopolist manufacturer, over a linear price and a two-parttariff contract, in a way that can be described by a Nash Bargaining Solution. Thechapter compares the effect of different types of mergers on the merged parties'bargaining strength. The results point to the size of the merged entity being a misleadingproxy for its buyer power and suggest that using a modified version of Shapiro'sdiversion ratios, which are termed "buyer diversion ratios", is a better way to analysethe buyer power implications of mergers between retailers.Finally, chapter 6 concludes considering the main results of the thesis in terms bothof economic theory and competition policy. The chapter also discusses the limitations ofthis thesis and identifies areas were the research could be taken forward.
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University of East Anglia
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