When large retailers join forces to negotiate with suppliers, it is not necessarily the consumer who benefits. That is the central finding of research by Stéphane Caprice and Patrick Rey, published in the December 2015 issue of the Economic Journal, which shows that cost savings related to so-called ''joint purchasing agreements'' may not lead to lower retail prices.
Their study provides a theoretical underpinning for concerns voiced by the European competition and many antitrust authorities: that cost savings or other efficiencies which only benefit the parties to the joint purchasing arrangement will not suffice; cost savings need to be passed on to consumers.
What''s more, the new analysis echoes further concerns that are often expressed in policy circles: that suppliers will respond to retailers'' growing buying power by under-investing in production and innovation.
The researchers note that in recent decades, retailers have increasingly sought to join forces so as to enhance their buying power vis-à-vis suppliers. The ability to make a joint listing decision (or, more precisely, a joint delisting decision) is a commonly recognised benefit of such collective bargaining. The threat of delisting has been viewed by economists as an important lever in negotiations between large retailers and their suppliers.
The question of whether a larger buyer''s bargaining position is desirable for reducing prices for final consumers has been discussed by legal and economic scholars since the 1950s without a firm conclusion being reached. The main findings of the new research is that joint listing decisions can indeed enhance the bargaining position of the retailing chains without affecting final prices or even leading to higher final prices.
The study focuses on the bargaining power that retail chains confer on retailers that are and remain competitors. Transforming individual listing decisions into a decision that binds all members of a retail chain makes such a decision less harmful for a retail chain member, as the other members of the retail chain will also have to deal with alternative suppliers. This in turn enhances the bargaining position of each member by raising the value of its outside option.
Moreover, when purchasing terms are centrally negotiated, the bargaining effects are still present. But in addition, consumers face higher prices and retailing competitors benefit from the formation of a retailing chain.
Retailing chains also have a direct impact on suppliers'' investment incentives. When retailers join forces to enhance their buying power, suppliers adjust their investments according to the new bargaining position of their buyers. Earlier research argued that downstream competition tends to induce suppliers to overinvest in productivity, so as to improve their bargaining position vis-à-vis retailers.
The new study finds that enlarging a retailing chain may further foster suppliers'' investment incentives when the retailing chain is not too large, but tends instead to reduce investment incentives when the retailing chain is already quite large. This echoes the concern frequently expressed in policy circles: that suppliers respond to retailers'' growing buying power by under-investing in innovation and production.
''Buyer Power from Joint Listing Decision'' by Stéphane Caprice and Patrick Rey is published in the December 2015 Economic Journal. Stéphane Caprice and Patrick Rey are at the Toulouse School of Economics.
