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Buyer Power and the “Waterbed Effect”

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Abstract
We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the “waterbed effect”). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified “waterbed effect” holds irrespective of whether a firm grows by acquisition or “organically” by becoming more efficient.

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  • Roman Inderst & Tommaso M. Valletti, 2008. "Buyer Power and the “Waterbed Effect”," CEIS Research Paper 107, Tor Vergata University, CEIS, revised 10 Jul 2008.
    • Handle: RePEc:rtv:ceisrp:107
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    1. Adrian Majumdar, 2005. "Waterbed Effects and Buyer Mergers," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2005-07, Centre for Competition Policy, University of East Anglia, Norwich, UK..
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