paper No. 04-008
"Buyer Power" and Economic Policy
Roger G. Noll
The rise to prominence of Wal-Mart and other big-box retailers has given new life to the debate about whether “buyer power” at intermediate links in a vertically related chain of industries is good or bad for consumers and hence whether it requires the attention of competition authorities. The term is rarely precisely defined, but as used by most commentators “buyer power” refers to the circumstance in which the demand side of a market is sufficiently concentrated that buyers can exercise market power over sellers. A buyer has market power if the buyer can force sellers to reduce price below the level that would emerge in a competitive market. Thus, buyer power arises from monopsony (one buyer) or oligopsony (a few buyers), and is the mirror image of monopoly or oligopoly. Like monopoly, the motivation behind monopsony behavior is to transfer wealth in the form of economic rents from one side of the market to the other.
Concern about monopsonization—and successful antitrust litigation against firms that use buyer power to extract price concessions from sellers—is hardly new. The first of the federal government’s antitrust suits against the Great Atlantic and Pacific Tea Company found that A&P had violated the antitrust laws by obtaining discounts on its wholesale purchases of food products that were not available to others.1 Numerous antitrust cases in professional sports have found that monopoly sports leagues violate the antitrust laws by adopting practices that substantially restrict competition among teams in the market for players.2 More recently, the Federal Trade Commission has issued reports that discuss monopsony in e-commerce, health care, and petroleum, and more generally inmerger enforcement, while concerns about “big-box” retailers likeWal-Mart have given rise to government studies and investigations in the United States and Western Europe.
This article reviews the economics of monopsony and policies that would seek to curtail the exercise of buyer power.
Download this paper (PDF)