Buyer Power and the “Waterbed Effect”

Inderst RomanValletti Tommaso M.
CEIS Research Paper
We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the “waterbed effect”). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified “waterbed effect” holds irrespective of whether a firm grows by acquisition or “organically” by becoming more efficient.
Number: 107
Volume: 6
Issue: 1
Date: Thursday, July 10, 2008
Revision Date: Thursday, July 10, 2008