Upstream competition. Stéphane Caprice Toulouse School of Economics

Transcription

1 Upstream competton and buyer mergers Stéphane Caprce Toulouse School of Economcs GREMAQ-IRA 1

2 Buyer frms often merge n order to obtan lower prces from supplers What s the contrbuton of ths paper? Explan n whch crconstances mergng buyers may obtan lower prces n negotaton wth supplers 2

3 Examples nclude Retalng market of luxury perfumes and cosmetcs Chans use sze to negotate wth prestge trademarks Maronnaud (Alrodo, Swss chan,2000; Etxezur, Conrado Martn, Mendoza, Soledad, Spansh chans, 2002; Belleza, Dmalta, Italan chans, 2002; ) bought by AS Watson (Europe and Asa) «AS Watson s greater sze obvously translates nto a larger buyng power» AS Watson One gant s leap, 20 October, 2006, European cosmetc markets magazne 3

4 Home mprovement retal sector Kngfsher currently expandng n 11 European and Asan markets Sze enables t to negotate better wth bg nternatonal t supplers Grocery retal market European cross-border buyng allances EMD, AMS, Intercoop/AF IT, Eurogroup, SED, Europartners, BIGS Around two-ffths of the total EU market 4

5 Schema A B A B Sze matters Mergng buyers contnue to buy from both sellers And buyer merger causes no dsrupton 5

6 Related lterature Chpty and Snyder, 1999 (RES) Raskovch, 2003 (JIE) 6

7 A smple Framework: the barganng nterface model wth a monopoly suppler A T( x) C( ) where = x ( ) 1 2 ( ) ( 1 ) T 1 ( x 1 ) R( x ) T ( x ) R x ( ) ( ) R x T x ndependent d outlets or markets 7

8 ash barganng, ( α,1 α ) (Blateral effcent contractng) Merger of outlets r A ( ) ( ) TT x C ( ) where = x 1 2 ( ) R ( ) ( x) T ( x ) x T x r rr ndependent outlets or markets 8

9 Let s defne ( ) * = Arg R C π max * * * = R C ( ) * * * r= ( r ) R C ( r ) π = ( * * π, ) π r r Revenuesof buyer= f v * * Incremental contrbuton,ππ π r Outsdeopton, v v = 0 r r 9

10 C( ) IM+M<2M M IM Merger of two outlets ( 2) * ( 1) * * Industry Quantty Convex producton cost C'' ( ) > 0 10

11 M IM * π x Merger of two outlets IM+M>2M 2 1 x Outlets Industry Surplus * π x 11

12 π * * π r 1 2 r umber of outlets controlled by a buyer * * Incremental contrbuton π π r 12

13 The mergng of buyers account for a larger fracton of the suppler s s total sales and thus negotate less well at the margn Suppler s ncreasng margnal producton costs (concave ndustry surplus) ncremental cost decreases more steeply than n proporton wth buyer sze large buyers pay a lower prce per unt 13

14 Our framework What s new? Upstream competton to supply mperfect substtutes Focus on buyer power Drect barganng effect (1) See the model wth a monopoly suppler Indrect barganng effect (2) Related to ncreasng the buyer s outsde opton 14

15 A ( ) ( ) T x C A A A B ( ) ( ) T x C B B B ( ) ( ) 1 2 ( ) ( A B Rx, x ) ( A B Rx ) 2, x ( A B) 2 Rx, x 1 1 A ( A) B( B T x T x ) T A ( ) ( ) 2 x A B B 2 T2 x A ( A ) B ( B ) 2 T x T x ndependent d outlets t or markets 15

16 A ( ) ( ) T x C A A A B ( ) ( ) T x C B B B r Merger of ( ) ( ) outlets 1 2 ( ) A B x x ( A B Rx, ) A A B B x ( ) ( ), r r T A ( x A ) T B ( x B ) rr T x T x ndependent outlets or markets 16

17 The barganng protocol A smple Framework: Blateral negotatons suffcently complex to rule out problems of double margnalzaton Blateral l effcent contractng, t At equlbrum, blateral supples maxmze total ndustry profts. Off equlbrum, If barganng breaks down between one buyer and one suppler k, we allow for renegotaton between the buyer and the other suppler -k. α,1 α ( ) 17

18 Let s defne R C C A B A,* B,* A B, = argmax A B,, A B Blateral effcent contractng, ( ) ( ) A B At equlbrum, blateral l supples maxmze total t ndustry profts. ( ) r,* x% = arg max k rr 0, x C x x + k k k k k Followng a breakdown between one buyer and the suppler k Off equlbrum, renegotaton between the buyer and the other suppler, the suppler -k. 18

19 π π π A,* B,* * A,* B,* = R, CA CB ( ) ( ) A,* B,* k,* k,* r= ( r ) R, + rr 0, k,* Ck r C k,* ( ) ( k ) A,* B,* k k,~ x % r = ( r), 0, R + rr r k,* k,* k k ( ) k ( ) % C r C r + x 19

20 Revenuesof buyer k k k = f π π, v π π n negotaton wth k ( *,* (,~,* )) r r r r Incrementalcontrbuton, contrbuton, π * k,* π r Outsdeopton, v π ( k,~ k,* π ) r r r 20

21 For an llustraton, Consder the barganng game of the mergng buyers (merger of two outlets) wth respect to suppler A Supplers A and B, convex producton costs 2 * k,* π π r 0 2 > r Drect barganng effect: (+) π π < k,~ k,* r r 0 2 r Indrect barganng effect: (-) 21

22 C ( A ) A IM+M<2MM ( ) A C '' > 0 A M IM ( 2 ) A,* ( 1 ) A,* A,* A Industry Quantty 22

23 π * A,* π r 1 2 umber of outlets Incremental contrbuton * A,* π π r r controlled by a buyer Drect barganng effect: (+) 23

24 C ( B ) B IM M IM+M>2M B ( B ) C '' > 0 B Industry Quantty B,* ( ),* 1 B + x% B 1 ( ),* 2 B + x% B

25 π π k,~ k,* r r 1 2 Outsde opton ( k,~ k,* v ) r π r π r r umber of outlets controlled by a buyer Indrect barganng effect: (-) 25

26 More generally, Average proft by outlet of buyer : Sze dscount whenever: t t φ = R, r r A,* B,* A,* B,* k,*,* k φ 1 t t = > r r k= A, Br r k k DE + IE > 0 k = A, B 0 26

27 Proposton 2 ( ) If C '' x k > 0 for x k > 0, then DE k >0. k ( ) ( ) If C '' k 0 k 0 k k x < for x >, then DE <0. If C '' x l > 0 for x l > 0, then IE k <0. l Let s assume Corollary ( ) ( ) ( ) If C '' x l < 0 for x l > 0, then IE k >0. l A ( ) = ( ) = ( ) C x C x C x k k If C" x > 0 for x > 0, sze dscount only when DE > IE. k k If C " x < 0 for x > 0, sze dscount only when DE <IE. B 27

28 Illustratve examples (1/2) Supplers producton technology descrbed d by convex cost functons = 6 r BPD k > BPI k 3 Proftable Buyer merger γ Inverse demand functons ( ) γ B( ) P x, x = 1-x - x and P x, x = 1-x -γx A A B A B A B B A 28

29 In the frst example, any ncrease n upstream compettveness mpars the level of mergng buyers outsde opton, ncreasng the relatve mportance of the negatve ndrect barganng effect. 29

30 Illustratve examples (2/2) Supplers producton technology descrbed by concave cost functons = 6 r 6 5 BPD k < BPI k 4 3 Proftable Buyer merger γ Inverse demand functons ( ) γ B( ) P x, x = 1-x - x and P x, x = 1-x -γx A A B A B A B B A 30

31 In the second example, the outsde optons of the mergng buyers become wder along wth the ncrease n upstream compettveness, thus ncreasng the relatve mportance of the postve ndrect barganng effect. 31

32 Concludng remarks Focus on buyer power, two sources Drect barganng effect (1) Indrect barganng effect (2) (Related to ncreasng the buyer s outsde opton) Chpty and Snyder (1999) concludes n the cabletelevson ndustry that merger should worsen than enhance the buyers barganng poston snce the upstream producton cost functon was concave. ew nsght snce buyer merger now may be proftable even f producton cost functons are concave. 32

33 Blateral effcent contractng, equlbrum quanttes are unchanged n buyer mergers. Dobson and Waterson (1997) The framework can be used to analyze the potental adverse long-term consequences of buyer power on supplers economc vablty and ther ncentves to nvest and nnovate Inderst and Wey (2003, 2006), Inderst and Shaffer (2006) 33

34 Dana (2007); Inderst and Shaffer (2007) Where buyer group or mergng frms commt to buy exclusvely from a sngle seller. Inderst (2006), Smth and Thanassouls (2006) Imperfect substtutes (More general nsght, concave costs, ) 34