Three Essays on Buyer Power, Market Structure and Government Subsidies

Title: Three Essays on Buyer Power, Market Structure and Government Subsidies
Authors: Ding, Hong
Date: 2013
Abstract: Chapter 1: Downstream Competition and the Effects of Buyer Power The first chapter examines the interaction between buyer power and competition intensity in the downstream market in affecting consumer and total welfare. We study a model where oligopolistic retailers compete in quantity in the downstream market and one of them is a large retailer that has its own exclusive supplier. Negotiation between this retailer and its supplier is modeled as a generalized Nash bargaining game. We demonstrate that an increase in the buyer power of the large retailer against its supplier leads to a fall in retail price and consequently an improvement in consumer surplus and this is true even in the extreme case where the downstream market is served by a monopoly. More interestingly, we find that the effects of buyer power are large when the intensity of downstream competition is low, with the effects being the largest in the case of downstream monopoly. This suggests that buyer power and downstream competition are substitutes. Chapter 2: Subsidy, Product Diversity and Buyer Power The objective of the second chapter is to analyze the effectiveness of government subsidies in promoting product diversity when the downstream firm (a retailer) has buyer power. We extend the standard Dixit-Stiglitz model of monopolistic competition and compare the effects of subsidies on equilibrium number of product varieties and social welfare in the case where products are sold directly to consumers and the case where they are sold through a monopoly retailer with buyer power. Two types of subsidies are considered, a subsidy on marginal cost and a subsidy on fixed cost. We find that while the two types of subsides have different effects on the quantity and retail price of each variety, they both raise the number of product varieties and the social welfare. Moreover, a combination of the two types of subsidies is able to achieve the social optimum. These results are true even when products are distributed through a downstream monopoly retailer who has all the bargaining power, but the mechanism through which a subsidy increases product varieties is different. In comparison with the case where products are distributed directly to consumers, retailer buyer power reduces product variety and social welfare. Furthermore subsidies become less effective in the presence of buyer power. To be more specific, retailer buyer power has both a level effect and a marginal effect on product diversity. At any given subsidy rate, the equilibrium number of varieties is smaller and a marginal increase in subsidy leads to a smaller increase in the number of varieties. Chapter 3: Subsidy on Complementary Products in a Model of Monopolistic Competition The third chapter seeks to re-examine the market provision of product diversity under monopolistic competition and the effects of an infinitesimal subsidy on product variety and social welfare in the case of complementary products. This examination builds on the standard Dixit-Stiglitz model of monopolistic competition but assumes an alternative demand linkage. The results show that, different from the case of substitutable products, demand complementarity leads to multiple equilibriums and the number of product varieties could be higher or lower than the constrained optimum depending on the level of the fixed cost of production. When the fixed costs are small, the market yields too many products and an infinitesimal subsidy exacerbates the problem leading to an over-supply of product varieties. On the other hand, when the fixed costs are large, there are too few products and in some cases the complementary goods industry becomes non-existent. A subsidy that induces a switch of equilibriums enhances product variety and improves social welfare.
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