Countervailing Power
‘Countervailing power’ is a term coined by J.K. Galbraith (1952) to describe the ability of large buyers in concentrated downstream markets to extract price concessions from suppliers. Galbraith saw countervailing power as an important force offsetting su
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countervailing power
difficult because it is difficult to model bilateral monopoly or oligopoly, and there exists no single canonical model. Whether and how wholesale discounts to large downstream firms are passed through to final-good consumers is unclear. The concept has the controversial antitrust implication that horizontal mergers between downstream firms may be pro-competitive. There are a number of theories explaining why large buyers obtain price discounts from sellers. A simple theory is that the cost of serving large buyers is lower per unit than that of serving small buyers. Serving large buyers may involve lower distribution costs. For example, the supplier may be able to ship its product to a large buyer's central warehouse rather than having to ship it to the individual retail outlets owned by small buyers. Serving large buyers may also involve lower production costs. For example, if the supplier's production function exhibits increasing returns to scale and the supplier serves one buyer at a time each production period, per-unit production costs will be lower when serving a large buyer. Other theories involve more subtle strategic effects. A literature including Horn and Wolinsky (1986), Stole and Zwiebel (1996), Chipty and Snyder (1999), Inderst and Wey (2003) and Raskovich (2003) considers a model in which a monopoly supplier bargains under symmetric information separately and simultaneously with each of a number of buyers. Each buyer regards itself as marginal, conjecturing that all other buyers consummate their negotiations with the supplier efficiently. If aggregate surplus across all negotiations is concave in quantity, the marginal surplus from a transaction involving a large quantity is higher per unit than that from one involving a small quantity. This higher per-unit marginal surplus for large buyers translates into a lower per-unit price. The aggregate surplus function would be concave, for example, if the supplier has increasing marginal production costs. Even if the supplier's cost function were linear, the total surplus function effectively becomes concave if the supplier is assumed to be risk averse, as in Chae and Heidhues (2004) and DeGraba (2005). Size discounts also emerge if large buyers' outside options are better. In Katz (1987) and Sheffman and Spiller (1992), for example, the larger the buyer, the more countervailing power credible are its threat of integrating backward and producing the good itself. Size discounts also emerge if the 'Countervailing power' is a term coined by J.K. Galbraith (1952) to describe the ability of large buyers in concensupplier's outside option is worse when facing a large trated downstream markets to extract price concessions buyer. In Inderst and Wey (2007), for example, if bargaining with a large buyer breaks down, it is difficult for from suppliers. Galbraith saw countervailing power as an important force offsetting suppliers' increased market the supplier to unload this large quantity on the other power arising from the general trend of increas
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