UC Berkeley

This paper argues that rival retailers may choose to differentiate their supplying producers, even at the expense of downgrading the quality of the product offered to consumers, to improve their buyer power. We show that, through the differentiation of suppliers, a retailer may obtain a larger slice of a smaller pie, i.e, smaller bilateral joint profits. Thus, the "only" purpose of differentiation is to gain increasing buyer power. This result may hold (i) when retailers compete in the final market or (ii) when retailers are active in separate markets. The differentiation of suppliers, which results from a buyer power motive, may be harmful for consumer surplus and social welfare.