Buyer Power and Price Formation in Intermediate Goods Markets: a Dynamic Perspective

Abstract

This thesis studies how buyer power affects input prices in intermediate goods markets. The aim is to investigate how a buyer can invest to increase buyer power, and we use Inderst and Wey (2007) as a baseline for our study. We further extend the model to allow for size-based investment downstream and use the framework to briefly touch on the topic of prohibiting price discrimination. Our paper discusses previous literature on buyer power and price formation and provides somewhat novel insight into buyer-side investment incentives, an area where extant research is relatively narrow. We use a downstream agent’s total number of operated stores as a measure of buyer power and vary how the agents can acquire additional stores. We find that large buyer discounts depend on whether or not investments introduce additional retail stores to the market. When agents only reallocate stores, large-buyer discounts are amplified through investment. On the contrary, introducing new stores raises input prices faced by all buyers, and smaller buyers may have a higher incentive to grow. Interestingly, when all buyers invest, it might reduce their individual profits. They may still choose to invest in order not to fall behind. Furthermore, we provide some evidence that forbidding price discrimination may be welfare-hindering and reduce investment incentives.