6 Conclusions
This paper uses business-to-business transaction panel data of the UK bricks industry to study the effect of countervailing power and geographic price discrimination on ex-works brick prices. The main findings are: (a) nonlinear volume and freight absorption effects; (b) a countervailing power effect that is due to a buyer’s local business size or commercial significance: buyers with larger local presence enjoy higher bargaining weights and get lower ex-works prices, unlike smaller buyers; (c) a local competition effect: having more established manufacturers that are local to the delivery site as outside options when bargaining reduces the prices that buyers pay; and (d) a capacity constraint effect: Small buyers that buy directly from manufacturers benefit more from outside options because, unlike large buyers, with regard to their outside options they are not constrained by the capacity of potential suppliers. The relative magnitude of the identified effects is substantively important. The local competition effect dominates the countervailing power effect: The former is enjoyed by large and small buyers, while the latter benefits only large buyers. This is important for competition assessment because the former, at least to some extent, is under the buyer’s control, while the latter is not, at least not in the short run. Given the scarcity of reduced-form empirical work in business-to-business bargaining, the approach that is presented in this paper has the potential to contribute to empirical competition analysis and practice as it relates to markets that involve business-to-business relationships. The primary challenge will be to adapt the empirical approach to the respective industry details. For example, while brick transaction quantities in the construction industry may plausibly be regarded as exogenous demand that is dictated by building designs, transaction quantities in grocery wholesaling between supermarkets and their suppliers are more likely to be endogenous, as part of negotiations between grocers and their suppliers at the national level.
