Buyer power

 

Author Definition

 

Definition

Buyer power describes the bargaining position of a buyer with respect to its supplier(s) of goods or services. Through purchasing strategies, the buyer, unilaterally or through coordination with other buyers, can decrease the purchasing price of its input below the supplier’s standard selling price, above or below the competitive level. Two sub-types of buyer power are distinguished: first, monopsony power, which implies a withholding effect, being inefficient and dubbed the reverse of monopoly power; and second, bargaining (or countervailing) power, in which tactics other than withholding may be used to the benefit of the buyer to reduce the input’s price. Bargaining power tends to be welfare enhancing as supra-competitive profits kept by the supplier are passed on to the buyer and eventually to the end consumers if there is competition in the retailing market.

 

Commentary

Introduction – Buyer power is an often-neglected topic in the theory and practice of competition law. Buyer power is economically and legally complex. This is due to its dual nature as either a usually efficiency-enhancing purchasing behavior (bargaining power) or as an inefficient one (monopsony). Buyer power interacts and affects two markets. First and foremost, the upstream market, where the purchases are made; secondly, the retailing market in which the buyer acts as a retailer. Anticompetitive concerns prompted by buyer power have arisen across the whole spectrum of competition law: including agreements, abuse of market power, and concentration cases.

Monopsony power describes the situation in which the supply side of a market is perfectly competitive, represented by an upward-sloping supply curve, and in which a sole buyer is present. The buyer will exercise its market power by withholding purchases (i.e., buying less) to decrease the purchasing price it pays for a good/service below the level that would emerge in a competitive market. The price is set by the buyer fixing a purchasing price it is willing to pay for the input, in a take-it or leave-it offer, or by refusing to negotiate on price. In such a setting, the monopsonist becomes a price-maker. This approach to buyer (monopsony) power is essentially the reverse or mirror image of monopoly power. Monopsony is only possible when the buyer faces an upward-sloping supply curve, i.e., the more you buy, the more expensive the marginal unit becomes. Monopsony power exertion also implies suppliers selling below their marginal costs; if this is the case, the suppliers will be eventually driven out of the market. Monopsony cases tend to be rare. Buyers often try to exercise their purchasing power not through a reduction in purchases but by obtaining more favorable conditions However, a few demand withholding examples are found in the case law. Among them, the alleged imposition of abnormally low purchasing prices of film licenses by a dominant buyer (CICCE v Commission), agreements between buyers limiting the amount of durum wheat that macaroni producers would include in the formula (National Macaroni Manufacturers Association v. Federal Trade Commission) or fixing minimum purchasing prices for grapes for cognac (BNIC v Clair).

Bargaining power, often labeled as the ‘new’ approach to buyer power, describes the strength in bilateral negotiations of a buyer regarding its supplier(s). Bargaining power allows the buyer to obtain a concession (be it in the form of price and/or non-price terms) from the supplier by, for example, threatening to acquire goods from a different party or simply having the upper hand in the negotiation. Unlike monopsony power, bargaining power does not involve withholding demand or acquiring goods below the competitive price. Instead, it increases trade and neutralizes seller market power by transferring supra-competitive profits from the supplier to the seller that may be passed on eventually to the end consumers. This is because bargaining power can only be exercised where the price is above the supplier’s marginal cost. Therefore, bargaining power tends to be welfare enhancing, being this a reason why there are few anticompetitive cases involving this form of purchasing. That said, bargaining power may raise anticompetitive concerns; these are usually linked to exclusionary effects. Leverage of buyer power to obtain advantages in a subsequent downstream market through the offer of particularly beneficial (and loyalty enhancing) purchasing conditions was discussed extensively in British Airways v Commission through the grant of some ‘reverse’ rebates. Additionally, predatory buying has also been reviewed in the case law and found to be a plausible theory of harm, for instance, by the US Supreme Court in Weyerhaeuser Company, v Ross-Simmons Hardwood Lumber Company, Inc. Bargaining power is often used as a procompetitive argument to justify a conduct and render it compatible with competition rules. Prime examples of this situation are buying alliances that pool buyer power, leading to lower input prices and higher output, as discussed, for instance, in Gøttrup-Klim and Others Grovvareforeninger v Dansk Landbrugs Grovvareselskab, or Northwest Wholesale Stationers, Inc. v. Pacific Stationery Printing Co.

Countervailing buyer power, or the ability to sufficiently neutralize opposing market power based on the buyer’s bargaining strength in a commercial relationship, has been a topic of discussion in concentration and abuse of dominance cases. While often invoked, practice shows that meeting the sufficiency requirements for countervailing buyer power to effectively prevent seller market power exertion is rare. This neutralizing power must benefit not only the large buyer exerting it but also spill over to other (smaller) buyers, as discussed in Enso/Stora.

The type of harm required for EU competition law to be applicable to buyer power cases has also been analyzed by the case law. European courts have found that buyer power liability arises without requiring direct evidence of end consumer harm (e.g.: British Airways v Commission, as well as the spill-over effect requirement in countervailing buyer power cases, such as SCA/Metsä Tissue). This means that harm that can be proven and has taken place in the upstream market in and by itself is sufficient for competition law to apply; not that this necessarily implies that inefficient suppliers are protected, or that end consumer harm is irrelevant. A narrower approach that focuses on the effects on the output market and, therefore, also direct end consumer harm appears to be adopted in the USA in Weyerhaeuser Company, v Ross-Simmons Hardwood Lumber Company, Inc. This narrower approach assumes that buyers always compete in the same upstream and downstream markets, which is not necessarily the case.

The EU Competition law’s scope of application has been defined regarding which purchases are controlled by it and, therefore, determining which exercises of buyer power (or by whom) could be illegal. Not all purchases by an entity imply an economic activity, a defining factor for EU competition law to be applicable. In FENIN v Commission, the ECJ stressed that establishing whether purchasing constitutes an economic activity “must be determined according to whether or not the subsequent use of the purchased goods amounts to an economic activity”.

The topics of unfair purchasing practices, gatekeeping and economic dependence have recently brought rare attention to buyer power. Discussions on fairness, relative market power, and exploitation of small suppliers by large buyers combine issues related to antitrust, contractual equilibrium, and fair competition. Most instances of unfair purchasing practices (e.g.: delisting, slotting allowances, etc.), typically related to the food retailing sector, will fall outside the scope of antitrust rules as buyers tend not to be dominant. Regulatory solutions to unfair purchasing practices have been adopted in various countries, including most EU member states and the USA. Legislative interest and concern in the matter led to the Directive (EU) 2019/633 on unfair trading practices in business-to-business relationships in the agricultural and food supply chain in April 2019. Gatekeeping, or the ability of buyers to create entry or exit barriers to either the upstream or downstream market, is another buyer power topic enjoying a renaissance because of the discussions on the regulation of digital markets. Examples related to unfair purchasing, gatekeeping, and economic dependence are found in the case law and EU Commission’s practice, such as the Kesko/Tuko concentration case.

 

Bibliography

Cartensen, Peter C. Competition Policy and the Control of Buyer Power: A Global Issue. Edward Elgar (2017). 304 pages.

Chen, Zhiqi. “Defining buyer power.” Antitrust Bulletin. 53 (2008): 241.

Herrera Anchustegui, Ignacio. Buyer Power in EU Competition Law. Institut de droit de la concurrence/Concurrences (2017). 652 pages. Winner of the 2017 Concurrences Award to the best PhD thesis in Competition Law & Economics.

Kirkwood, John B. “Buyer power and exclusionary conduct: Should Brooke Group set the Standards for Buyer-Induced Price Discrimination and Predatory Bidding?” Antitrust Law Journal 72 (2004): 625.

van Doorn, Frederik, The Law and Economics of Buyer Power in EU Competition Policy. Eleven International Publishing (2015). 230 pages.

Author

Quotation

Ignacio Herrera Anchustegui, Buyer power, Global Dictionary of Competition Law, Art. N° 12328

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Institution Definition

Ability of one or more buyers, based on their economic importance on the market in question, to obtain favourable purchasing terms from their suppliers. Buyer power is an important aspect in competition analysis, since powerful buyers may discipline the pricing policy of powerful sellers, thus creating a "balance of powers" on the market concerned. However, buyer power does not necessarily have positive effects. When a strong buyer faces weak sellers, for example, the outcome can be worse than when the buyer is not powerful. The effects of a buyer’s strength also depend on whether the buyer, in turn, has seller power on a downstream market. © European Commission

 
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