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Programme franco-allemand en SHS (FRAL)
Edition 2012


CBVC


Competition and Bargaining in Vertical Chains

Competition and Bargaining in Vertical Chains
Vertical chains designate industry structures where some firms (at the upstream level) supply other firms (at the downstream level). Imperfect competition usually prevails at both levels, and upstream and downstream firms also bargain with one another.

Goals
The goal of this project is to understand the strategies of vertically related firms within an industry, in terms of either competition or bargaining, and to analyze their consequences on the price, variety and quality of the products offered to consumers. This issue is essential both to understand firm's strategies and to provide answers to current questions faced by competition authorities.
The overall project consists of four work packages. The goal of the first work package is to understand how competition and the balance of power between upstream and downstream firms affect the different types of investments realized by firms within a vertical chain. In particular, we focus on vertically related firms’ incentives to invest in quality or in operating cost reduction, in quality labeling and in corporate social responsibility. The second work package aims at integrating the diversity of retail formats in the analysis of both retail competition and the balance of power between retailers and their suppliers. Multi-format retail competition results from the heterogeneity of consumer’s shopping behavior and is likely to generate specific competition strategies (cross subsidization, loss-leading, etc.) as well as new bargaining strategies towards suppliers. The third work package rather focuses on anticompetitive effects of contracts, such as foreclosure effects or the control of competition, within vertical chains in a static framework. The last work package focuses on vertically related firms’ strategies in a dynamic perspective. Collusion or reputation strategies also as firms' strategies when confronted to uncertainty will be analyzed.

Combining three methodological approaches.
To reach this goal, our project combines theoretical industrial organization research with empirical and experimental studies.

Results

An empirical project «Empirical Assessment of Buyer Power in Retailer Manufacturer Relationships« has been led jointly by French participants at TSE (C. Bonnet, Z. Bouamra-Mechemache) and German participants at DICE (J. Haucap, U. Heimeshoff, G. Klein, D. Rickert, C. Wey). This work empirically assesses the buyer power of retailers towards theirs manufacturers both in the milk and the coffee vertical channels, using a structural econometric approach. A reduced form analysis of the local power in the beer vertical chain was also developed.
V. Nocke (Manheim) and P. Rey (TSE) in “Vertical Integration and Foreclosure in Multilateral Relations” develop a model of multilateral vertical relations .They show, in a framework of secret contrats, that vertical integration between a manufacturer and a retailer leads to the foreclosure of rival manufacturers from access to the integrated retailer, at the detriment of consumers.
C. Chambolle, C. Christin and G. Meunier analyze in “Optimal production channel for private labels: Too much or too little innovation? «, the impact of the private label production channel on innovation. On the one hand, when the private label is integrated, the retailer over-invests to increase its buyer power. On the other hand, when the brand manufacturer produces the private label, a hold-up effect leads to under-investment.
C. Christin and E. Avenel show that firms may engage in strategic overbuying, purchasing more of the input when the supplier is capacity constrained than when it is not in order to exclude their competitor from the final market.
S. Caprice, and P. Rey in “Buyer power from joint listing decision” show that collective bargaining can enhance retailers’ buying power vis-à-vis their suppliers and that this additional buyer power can have an ambiguous impact on the upstream leader’s incentives to invest.
These projects have been presented at the quick off meeting at DICE that took place in June 19th-20th, 2013.

Outlook

These first results take place in the different Work Packages of our initial CBVC project. We plan to go on by developing further these projects and also develop the other projects mentioned in the different workpackage. We also try to reinforce our team work with German participants to the project.
Every year a workshop will take place. the next workshop will be held in Rennes in june 2014. These workshops enable all participants to the project to meet but also to confront our results with invited researchers, (outsiders to the project) who are also well known international experts in our research areas.

Scientific outputs and patents

The quick-off meeting of the project took place at «Düsseldorf Institute of Competition Economics«, on June the 19th- 20th, 2013
List of results:
WORK PACKAGE 1: INVESTMENTS IN VERTICAL RELATIONS

Task 1.1: Quality investments
Claire Chambolle , Clémence Christin et Guy Meunier , “Optimal production channel for private labels: Too much or too little innovation? «, Centre de Recherche en Economie et Management, WP 2013-14.


WORK PACKAGE 2: SHOPPING BEHAVIOR, NEW RETAIL FORMATS COMPETITION (FROM HYPER TO DISCOUNTERS) AND BUYER POWER

Task 2.1: Multi-format competition and buyer power
Stéphane Caprice, et Patrick Rey, 2012, “Buyer power from joint listing decision”, TSE Working Papers, 12-294.

Task: 2.3: Estimating buyer power

Celine Bonnet, Zohra Bouamra-Mechemache, & Justus Haucap, Ulrich Heimeshoff, Gordon Klein, Dennis Rickert ,Christian Wey, Empirical Assessment of Buyer Power in Retailer Manufacturer Relationships, mimeo.

Ulrich Heimeshoff, Gordon Klein , Bargaining Power and Local Heroes, DICE Discussion Papers, 87

WORK PACKAGE 3: VERTICAL CONTROL AND FORECLOSURE

Task 3.3: Waterbed effects and strategic overbuying

Eric Avenel, Clémence Christin, «Equilibrium Strategic Overbuying«, Centre de Recherche en Economie et Management, WP 2012-05.

Task 3.4: Vertical control with interlocking relationships
Volker Nocke and Patrick Rey, “Vertical Integration and Foreclosure in Multilateral Relations”, mimeo.

Partners

ALISS Alimentation et Sciences Sociales

CREM Centre de Recherche en Economie et Management

GREMAQ Groupe de Recherche en Economie Mathématique et Quantitative

ANR grant: 242 320 euros
Beginning and duration: avril 2013 - 36 mois

Submission abstract

Vertical chains are industry structures where some firms (at the upstream level) supply other firms (at the downstream level). Imperfect competition usually prevails at both levels, and upstream and downstream firms also bargain with one another. The goal of this project is to understand the industrial organization of vertical chains in terms of competition and bargaining to analyze its consequence on the price, variety and quality of the products offered to consumers. To reach this goal, our project combines theoretical industrial organization research with empirical and experimental approaches.
This project follows a previous Franco-German project that was financed by the ANR and the DFG over the period 2008-2011. This previous project was fruitful in many respects. First, we have shown important and original results in each of the tasks we had identified, and in most cases, these results have provided guidelines for competition authorities. Second, several Franco-German collaborations have emerged and besides, some have led to publications in top journals. The first project was, however, mostly theoretical. This new project will help us not only maintain and increase the existing interactions between participants in the field of theoretical industrial organization, but also develop new interactions between empirical and experimental economists who have joined on both the French and the German side. Finally, adding empirical and experimental analyses will allow us to focus on essential issues of vertical chains using three different and highly complementary methods.
The overall project consists of four work packages. The goal of the first work package is to understand how competition and the balance of power between upstream and downstream firms affect the different types of investments realized by firms within a vertical chain. In particular, we focus on vertically related firms’ incentives to invest in quality or in operating cost reduction, in quality labeling and in corporate social responsibility. The second work package aims at integrating the diversity of retail formats in the analysis of both retail competition and the balance of power between retailers and their suppliers. Multi-format retail competition results from the heterogeneity of consumer’s shopping behavior and is likely to generate specific competition strategies (cross subsidization, loss-leading, etc.) as well as new bargaining strategies towards suppliers. The third work package focuses on anticompetitive effects of contracts, such as foreclosure effects or the vertical control of competition within vertical chains. The last work package takes a dynamic perspective to analyze issues of collusion and reputation building as well as firms’ strategies in the presence of demand uncertainties.

 

ANR Programme: Programme franco-allemand en SHS (FRAL) 2012

Project ID: ANR-12-FRAL-0012

Project coordinator:
Madame Claire CHAMBOLLE (Alimentation et Sciences Sociales)
claire.chambolle@nullgmail.com

 

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The project coordinator is the author of this abstract and is therefore responsible for the content of the summary. The ANR disclaims all responsibility in connection with its content.