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Why Do Suppliers Charge Larger Buyers Lower Prices?
Author(s) -
Tyagi Rajeev K.
Publication year - 2001
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/1467-6451.00137
Subject(s) - tacit collusion , competition (biology) , collusion , consumer welfare , business , industrial organization , microeconomics , bargaining power , market power , differential (mechanical device) , welfare , economics , commerce , monopoly , market economy , ecology , aerospace engineering , engineering , biology
The phenomenon of input suppliers charging larger buyer firms, relative to smaller buyer firms, lower prices is commonly explained in terms of supplier economies of scale, supplier competition for larger buyers, and the larger bargaining power of larger buyers. This paper provides an alternative explanation, and shows that the observed direction of differential pricing can benefit the supplier by lowering the level of tacit collusion its buyers can sustain in their output market. This result also provides a new mechanism through which a ban on price discrimination by input suppliers may lower consumer welfare.