Buyer Groups as Strategic Commitments

33 Pages Posted: 12 Nov 2009 Last revised: 9 Dec 2009

See all articles by James D. Dana

James D. Dana

Northeastern University - Department of Economics; Northeastern University - Department of International Business and Strategy

Date Written: November 20, 2009

Abstract

Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. Most theoretical and empirical work on buyer groups has emphasized that buyer size can increase buyer surplus. In contrast, I argue that even an arbitrarily small buyer group that is composed of buyers with heterogeneous preferences can increase price competition among rival sellers by committing to purchase exclusively from a single seller. When there are two sellers, the grand coalition is a coalition-proof subgame perfect equilibrium, though many other equilibria exist including equilibria with ar- bitrarily many buyer groups. When there are n > 2 sellers, a coalition-proof subgame perfect equilibrium always exists, but the grand coalition is not an equilibrium. In the absence of transfer payments, all coalition-proof equilibria have a minimum of n(n − 1)/2 buyer groups, one for each pair of firms. With transfer payments, three sellers, and buyers have symmetric preferences, all coalition-proof equilibria are payoff equivalent and have a minimum of three buyer groups, one group for each pair of sellers.

Keywords: Buyer Groups, Buyer Power, Coalition Proof Equilibrium, Product Differentiation, Oligopoly

Suggested Citation

Dana, James D., Buyer Groups as Strategic Commitments (November 20, 2009). Available at SSRN: https://ssrn.com/abstract=1504211 or http://dx.doi.org/10.2139/ssrn.1504211

James D. Dana (Contact Author)

Northeastern University - Department of Economics ( email )

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617-373-7517 (Phone)

HOME PAGE: http://www.economics.neu.edu/dana/

Northeastern University - Department of International Business and Strategy

360 Huntington Ave
Boston, MA 02115
United States

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