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Abstract

This paper argues that rival retailers may choose to differentiate their supplying producers, even at the expense of downgrading the quality of the product offered to consumers, to improve their buyer power. We show that, through the differentiation of suppliers, a retailer may obtain a larger slice of a smaller pie, i.e, smaller bilateral joint profits. Thus, the “only” purpose of differentiation is to gain increasing buyer power. This result may hold (i) when retailers compete in the final market or (ii) when retailers are active in separate markets. The differentiation of suppliers, which results from a buyer power motive, may be harmful for consumer surplus and social welfare.

6. Conclusion

The main result obtained in this paper, that the differentiation of suppliers can be a source of buyer power, is novel. We have shown that, in some cases, retailers who seek to increase their buyer power by producers' differentiation may turn to a lower-quality good supplier. Our findings then also imply that a retailer may not always offer the “ best product” to consumers.We prove that, in the case of retail competition, differentiation for buyer power motives could be harmful both for consumers and industry profit. To motivate the assortment choice of our stage 1, we have introduced the example of hard discounters who specialize in selling non-branded goods to consumers. More specifically, this may also represent the choice of a retailer to offer private labels for a given product category. Of course, a retailer may experience other benefits as a result of specializing in the discounter format or in private labels. For instance, producers offering low-quality goods may also have lower production costs or lower bargaining power with respect to the retailer. While these may be additional explanations for the rise of hard discounters or private labels, they only add to our argument. Our model sets aside these forces to show that, all other things being equal (product cost, bargaining power), a retailer may have an incentive to switch to a low-quality good assortment in order to increase its buyer power. In terms of policy implications, our result argues for a retail regulation that would limit the switch of classic supermarkets with branded goods into hard discounters or limit the development of private labels. Note that our argument is only valid for a fixed retail market structure. If developing a hard discount format enables a new retailer to enter and compete in the market, then our analysis is reversed. A promising avenue for further research would be the study of suppliers' incentives to invest either in cost reduction technologies, affecting the convexity of the cost function (cf. Inderst and Wey (2007)), or in quality, in order to create more (or instead limit) differentiation of retailers.