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ASSESSMENT OF BUYER POWER IN COMPETITION LAW: A BOON OR A THREAT
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ASSESSMENT OF BUYER POWER IN COMPETITION LAW: A BOON OR A THREAT[1]
AUTHORED BY - DR. GAGAN DEEP KOUR
1. INTRODUCTION
The fundamental idea behind buyer power is that
by utilising the power they have in terms of bargaining as a powerful buyer,
customers can urge a seller to offer lower selling prices and favourable terms.
This works as a more intense force in business to business transactions (B2B)
because of the size or extent of the deals.[2] Along these lines, buyer power can be
recognized as, “a bilateral connection between retailer and supplier, driving
from the capacity of leading retailers to obtain from suppliers more favourable
terms than those available to other buyers, or which would be expected under
normal competitive conditions”,[3] i.e. these competitive conditions do not depend
on efficiency related to size or other variable factors (Dobson, 2005).
Be that as it may, this buyer power can all the while be a boon
and a hazard for competition and for markets. Firstly, it might bestow
countervailing force to the seller power, which might lead to lower prices in
the downstream market (unless it leads to a consecutive power).[4] However,
when buyer power does not exist in the presence of a strong seller power to
counter it, it may prove to be socially adverse. It might chip away the willingness
of the suppliers to invest, innovate and also stifles their long-term
feasibility.[5] Therefore,
the impact of buyer power in the economy is uncertain. So,
the researcher attempts to look at the following specific research questions:
i.
What are the various notions and
effects of buyer power on competition?
ii.
Can buyer power be termed as per
se infringing competition law i.e. is it a menace for competition law?
iii.
How the buyer power has been
assessed by various Competition authorities?
2. DIFFERENT DIMENSIONS OF BUYER POWER
2.1.
Conventional vs. Modern:
There are diverse definitions of buyer power
yet every definition of “buyer power” or “buying power” have compliance that
the concept of buyer power is about “ the market power that is practised by
buyers, but here distinction lies in the particular meaning of the market power
in question.”
(i)
Conventional
definition - One way to define the buyer power with the help of customary
meaning of market power, i.e. market power on the seller side, and then
overturn the explanation to define the buyer power or the power on the buyer
side.[6] The market power on the seller side, also
known as monopoly power can be defined as, “the capability of a firm to set
prices profitably above competitive levels.”[7] Going by the above statement, and reversing
this definition, buyer power could be defined as the ability of a buyer to set
prices profitably below competitive levels.
Roger G. Noll defines buyer power as:
“A buyer has market power if the buyer can force sellers to reduce price below
the level that would emerge in a competitive market. Here, the demand side of
market is sufficiently concentrated. Thus, a buyer power arises from monopsony
or oligopsony (a few buyers), and can be termed as the parallel image of
monopoly or oligopoly.”[8]
(ii)
Broader
Definition - A wider definition of buyer power includes the notion of
“bargaining power” or “countervailing power”. As defined by Zhiqi Chen:
“Buyer power is the ability of a buyer
to reduce the price, profitably below a supplier’s normal selling price, or
(more generally) the ability of buyer to obtain terms of supply more favourable
than a supplier’s normal terms. A seller’s profit maximising i.e. the normal
selling price prevails in the absence of buyer power. This buyer power is known
as monopsony power in case of a situation of perfect competition amongst
suppliers and in the case of imperfect competition, this normal selling price
stands above the competitive price, and the buyer power in such a case is known
as countervailing power.”[9]
2.2 Difference between
countervailing buyer power and buyer market:
The term “buyer power” when used generally, may
refer to two different concepts:
(i)
Countervailing
buyer power- It is the power of a buyer to create competition between its
supplier and its potential suppliers; or a to generate new competition on its
own, or bargaining strength that buyer holds in reference to seller in the
negotiations or transactions that are commercial in nature, because of its
size, significance and its ability to switch to alternatives of that particular
seller; [10]and
(ii)
Buyer market
power- It is a market power in buying , that emerges from the lack of effective
competition between buyers or in other words, a power that is derived from a
lack of competition.
Therefore, the buyer market power is an
outcome of the effective competition in the supply, and the countervailing
buyer power can be referred to as a factor that contributes to such
competition.[11]
3. EFFECT
OF BUYER POWER ON COMPETITION
Unlike the exercise of seller power, which generally leads to
outcomes such as higher prices, which directly affects the consumers in a
negative manner, the exercise of buyer power or presence of large number of
buyers with power may have positive or negative outcome. [12]
1.
Positive effects of buyer power:
Presence of powerful buyers has the effect of an
effective bargain over price and quality of the products and services. The
usage of buyer power is likely to counter any anticompetitive conduct in the
upstream seller market (countervailing buyer power) by preventing any increase
in price above the competitive level. Infact, a large number of buyers can make
seller’s cartels unsuccessful and less stable as the proposal of significant
orders to some of the sellers who are participants to the cartel, creates a
great incentive to deviate from the cartel or the collusive strategy.[13] As a result the
competition authorities and courts have attached a little importance to the
issue of the abuse of buyer power.[14]
2.
Negative effects of buyer power:
The exercise of buyer power may result in some different
adverse effects.
First, if buyer power is combined with seller power in
the downstream market and is utilised to increase such power, it is not
necessary that the consumers will reap benefits from the presence of large
buyers as the seller will not be motivated to pass through these cost-savings
to their own customers.
Second, it is not always the case that the consumers are
allowed to share the benefits that result because of the pressure exerted by
the buyers in the upstream market.
Thirdly, large buyers’ market power may also harm market
participants in the up- and downstream markets. Small suppliers are on the risk
line, which are forced to absorb the revenue loss and a very low return on
capital. This may consequently lower the incentives of the former to invest in
product quality and innovation to the detriment of consumers.
Fourthly, excessive pressures exerted on sellers may
generate additional costs that society will have to bear such as
taxpayer-funded subsidies granted to farmers in order, among other things, to
provide them with a reasonable standard of living.[15]
4. ASSESSMENT
OF BUYER POWER UNDER
COMPETITION LAW
Traditionally, bilateral relations are considered under competition
law only to the extent they have an effect on the market and an impact on the
welfare of consumers. Therefore, only when buyer power is associated with
market power on selling side, it is likely to have effects on the final market.
Buyer power is dependent on the market share of each retailer in
regard to the goods belonging to each product category in the market. The
antitrust authorities consider that a state of economic dependence is created
when a retailer has a market share of above 22 % in a particular category. In
such a situation, suppliers of the product cannot abandon them or refuse to
supply them. The second scenario is when retailers have shares between 10 to
20%. This scenario provides them with a strong negotiating power.
In third scenario, where retailers have shares below 10 %, the
situation would not be an asymmetric one. In its report on Groceries (2000),
the UK Competition Commission laid down that for economic dependence, a
threshold of 8% of purchases for resale for a certain retail channel is
required. There have been some other sector enquiries in various other
jurisdictions, which have been discussed further in the research paper.
4.1 ASSESSMENT OF BUYER
POWER IN MERGER CASES:
The phrase "buyer power" has been mostly used in
merger control in “Substantial lessening of competition” (SLC) Test. It relates
to a proposed merger that has a risk of a substantial lessening of competition
in a market between suppliers. Such a merger may be allowed because the
customers or the buyers hold the countervailing buyer power in that market.
The European Commission and the other antitrust Authorities have
held investigations on the effects of mergers in the retail market. Other than
their effects on the concentration the investigation is also based on the way
in which the barriers to entry would be raised because of the increase in
buying power shooting from the merger.
(i) Kesko/Tuko[16](Nov
1996):
This case relates to merger of two supermarket chains-
Kesko and Tuko having 60 % share in the market of daily consumer products. The two
supermarkets were based in Finland and most of the suppliers were dependent on
them for their 50-75% of their sales in the national market. This was the first
case in which the European Commission came up with the concept of “spiral
effect” [17] The Commission
had prohibited the merger, considering the high market share of the two merging
entities, which would eventually result in a high buying power.
The two large players, when merged, would be able to
obtain such level of lower input prices that no competitor will be able to
match. This would make any new entry very difficult.
So taking into consideration, the already high level of
concentration in the market in Finland, the commission did not permit the said
merger[18]
(ii) Rewe/Meinl [19](Feb 1999)
In this case, two firm retailers in Australia applied
for merger clearance, which held 30% market share in market for food retail
sales. The Commission observed that if the merger will be allowed, it will
affect 19 food categories in the market, out of which 10 will be in state of
dependence. This will lead to a “spiral effect”, i.e. dominance into retail
market would give rise to huge buyer power in procurement market. So some steps
had to be taken to reduce the buyer power of the new entity.
Hence, the Commission approved the merger subjected to
some conditions. The firms were to retrench it to 162 outlets, out of 341
outlets.
(iii) Blokker/Toys “R” Us
(June 1997)[20]
The case relates to merger of two Dutch toy retailers,
which had 50-60% market share in toy sales in Dutch Market. The commission
observed that firms had a buyer power over suppliers, which will be further
enhanced by unparalleled economies of scale in purchasing. This case is an
example where buyers form a powerful collusion on not to supply to certain
retailers,(in this case discounters.)[21]
4.2 The
Assessment of Buyer Power in Sector Inquiries / Market Inquiries-
(i) The Report on Food
Distribution Sector of the Austrian Competition Authority, [22]
This report was particularly focused on buyer power in a
highly concentrated retail market of food distribution.[23]
It was found that retailers negotiate a number of conditions once a year. But
in addition to the negotiations done yearly, the retailers also imposed some
retroactive rebates. It was found that such “ex-post negotiations” may
affect the business strategies of the suppliers and chip away their willingness
to innovate and invest without objective justifications. Considering these
factors and negotiations, BWB concluded that there were indications of the
existence of strong buyer power in the food distribution sector.
(ii) Avis of
the French Competition Council concerning the conditions of competition in
large retail distribution[24]
In this enquiry, the presence of buyer power had been
inferred by FCC from the relative behaviour of prices and discounts.
The time period of 1998 to 2003 was taken up. According
to the facts, in 5 years, the retail prices of large retailers increased by
11%, while the price of discounts decreased by the same percentage. Margins
that were reflected from invoices decreased by 9 % (from 44 per cent to 35 per
cent); but, margins not reflected in invoices increased by 10% (from 22 to 32
per cent). Therefore, it was concluded that this increase in prices was the
result of the increase in margins of the retailers. Here, the retailers’ buyer
power is reflected by the extensive use of out of invoice discounts. The FCC
envisaged that a two-party cooperative game was there among all market players,
and buyer power was playing a significant role.
(iii) UK - Competition
Commission Groceries Market Investigation Final Report, April 2008[25]
The
commission in its report, Para 41says, “We found that the exercise of buyer power by certain grocery
retailers with respect to their suppliers of groceries, which prevents or
distorts competition in connection with the acquisition of groceries by large
grocery retailers, some wholesalers and buying groups.”[26]
This enquiry by the UK Competition Commission was
initiated on request of OFT, after receiving various complaints regarding use
of buyer power by large retailers, which resulted in higher costs and entry
barriers for small retailers and new players. The enquiry was concerned with
the situation of the groceries market.
After holding around 80 hearings, the Commission
recognized that as substantiated in a number of prevailing practices, the UK
groceries markets are characterized by the existence of buyer power, which
increased the margin of the retailers but supplier had to bear the risk.
However, there was no sign that the benefits from the
buyer power does not pass on to the consumer. Also, the Commission was unable
to find evidence of any activities relating to predatory pricing. In fact, the
commission observed that amongst the main retailers in groceries market, there
appears to be competition despite the very high level of concentration.
Although it might be true that larger retailers are able to mince better
conditions from the suppliers, but in no way this transforms into a higher cost
for smaller retailers or new entrants. The commission observed that inspite of
the buyer power of major retailers; the smaller players can still improve their
position in respect of purchasing power, by joining the larger buying groups in
the market. Therefore in its findings, it said that “in many important
respects, competition in the UK groceries industry is effective and delivers
good outcomes for consumers.”[27]
(iv) Report of
the Nordic competition authorities “Nordic Food Markets - a taste for
competition” – November 2005[28]
This Report of the NCC dealt with the markets
where the prices and the concentration of both retail and supply of foodstuff
were very high.[29]
It was found that retailers in the market were
exploiting their power by practicing predatory pricing and were also obtaining
marketing allowances. The NCC found that this resulted in entry barriers for
new suppliers. Also, the smaller players were put at disadvantage. The
commission inferred that this can be a major reason for the supply side
concentration in the procurement market.
(v) The Report of the Italian
Competition Authority on the distribution of fruit and vegetables, June 2007
The Italian retail market falls under the less
concentrated markets. This Report of the Italian Competition Authority relates
to the distribution network of fresh food and vegetables.
It identified that the organisation of the trade has
been affected by the very slow switch towards a modern distribution system. As
a result, the modern distribution chains are at unfavourable position because
of lack of any vital trading mechanism which was centralised from the supply
side and also due to a higher flexibility of small retailers. So the commission
concluded that in such a very specific field, the presence of any buyer power
is not likely to be of any relevance for the Italian market.
5. CONCLUSION
From majority of the market investigations, cases and
enquiries carried out by competition authorities, the practices that have come
into picture demonstrate that retailers in a particular market have buyer power
in one or the other form, e.g. higher discounts for powerful retailers which
are not based on any efficiency or costs; most favourable treatment clause;
modified and unusual negotiated conditions, etc. Nevertheless, whether the harm
caused to the suppliers due to exercise of the powerful buyer power also
results in equal harm to the competition and the market structure or not, is a
debatable issue. Traditionally, these bilateral relations are taken into
account by the antitrust authorities; to the extent they have an impact on
“consumer welfare and the market”. Therefore, the commission and other agencies
have tended to downplay the anti-competitive effects of buyer power, unless on
the selling side, it is associated with market power. The reason behind this is
that if such power would have been absent, the retailers will be compelled to
transfer the benefits to the consumers. Therefore, the effect of buyer power
should be examined from both sides i.e. retail market and procurement markets.
In context of sector enquiries, most of the
investigations done by the commission have been focused on the effect that
buyer power has on risk sharing between retailers and suppliers, and also on
R&D (innovation and investment). The evaluations as to whether the buyer
power might affect consumer welfare negatively in the short run, differs from
case to case. The FCC has noticed in many cases that public intervention
through the prohibition of sale below cost with the aim of safeguarding small
retailers may facilitate collusion and in such cases it may negatively affect
consumer welfare. Although UK Competition Commission argues that the existing
small retailers and the new entrants in the market may join buyers’ group and
hence improve the bargaining conditions, but still most of the other reports,
foresee the subsistence of comparatively negative effects on small retailers
and new entrants. Except the Italian inquiry, most of the above mentioned
inquiries demonstrate that buyer power exists in one or the other form in
markets.
In the context of mergers, the antitrust Authorities
have examined whether it will create a “Spiral effect”.
So, it can be concluded that the buyer power can be both
a boon and a threat for competition. On the one hand, buyer power may enhance
seller power by providing a countervailing force and on the other hand, it may
lead to decrease in prices in the downstream market. However, when buyer power
exists in absence of a strong seller power, it may turn out to be a menace and
socially detrimental, because in such a situation, it may demoralize the
willingness, profitability and practical capability of suppliers and hence
undermine their willingness and incentive to invest in innovation. Therefore,
it can be said that the impact of buyer power may vary according to market
conditions, and hence no straight jacket formula can be tailored but a
“case-by-case analysis” approach should be adopted.
[1] Dr. Gagan Deep Kour, Assistant
Professor, School of Law, Bennett University
[2] William Lovejoy,
Bargaining Chains,56 Management
Science, 2282, 2291(2010)
[3] Gordon Mills, Buyer Power of Supermarkets, 10 Agenda,
145 (2003)
[4] David E. Mills, Countervailing Power and Chain Stores
, Economics Virginia at 4; retrieved from http://economics.virginia.edu/sites/economics.virginia.edu/files/Countervailing%20Power%20and%20Chain%20Stores4.pdf.
[5] Inderst & C.Wey, Countervailing Power And Dynamic
Efficiency, 9 Journal of the European Economic Association, 702, 703(2011).
[7] W. Kip Viscusi, Joseph E. Harrington, Jr., & John
M. Vernon; “Economics of Regulation and Antitrust”; 2005 at 294.
[8] Roger G. Noll; “Buyer Power and Economic Policy”, 72
Antitrust Law J. 589; 2005.
[10] Abir Roy, Competition Law in India (2008) at 150.
[11]Franck Latremoiere, Countervailing buyer power and
buyer market power, Reckon Open, June 2005; retrieved from http://www.reckon.co.uk/headlines-franckblog.
[12] Chloe Binet, “Buyer Power in EU Competition Law A
boon or impediment to consumer welfare?”, Université Catholique de Louvain,
2014
[13] R.Inderst & G.Shaffer, Buyer power in merger
control; Antitrust Handbook: Issues in competition law and policy; 2007,
Chapter XX, at 18.
[14] In this scenario, it is assumed that lower prices
negotiated upstream are passed on to consumers
[15]John B. Kirkwood, Powerful
Buyers And Merger Enforcement, 92 Boston University Law Rev. 1485,
1550(2012)
[16] Commission’s decision of 20 November 1996, Case
IV/M.784.
[17] Spiral effect refers to continuous strengthening of a
firm. If the size of a merged firm is bigger, it would lead to a larger
volume-related discount. This would enable such firm to undercut prices offered
by its rivals and offer lower prices. This would eventually increase its market
share. A greater market share would in turn raise the degree of its purchases,
which would increase its buyer power, and it will go on in this manner.
[18] Lars-Hendrik Roller;“Buyer Power in the EU” ;
American Antitrust Institute Conference on “Buyer Power and Antitrust”; June
2004; retrieved from http://ec.europa.eu/dgs/competition/economist/buyer_power.
[19] COMMISSION DECISION of 3 February 1999;Case No
IV/M.1221
[20] 126 F.T.C. 415, 592–96 (1998)
[21] OECD Policy discussion on Monopsony and Buyer Power;
2008; retrieved from https://www.oecd.org/daf/competition/44445750.
[22] Hanns Peter Nehl, Branchenuntersuchung
Lebensmittelhandel -The Austrian competition authority concludes inquiry in
food distribution sector highlighting indications of strong buyer power ;Concurrences Antitrust Publications, June 2007;
retrieved from https://www.concurrences.com/en/bulletin/news-issues/june-2007/The-Austrian-competition-authority-13981.
[23] Two largest retail groups had a combined market share
of 57% in 2005
[24]
Lucio Tome Feteira; Insights on Superior Bargaining Power; 64 International
Competition Law Series 251.
[25] The supply of groceries in the UK market
investigation; 30-04-2008; retrieved from http://www.ias.org.uk/uploads/pdf/Price%20docs/538.pdf
[26] The supply of groceries in the UK market
investigation; 30-04-2008; Para 41; retrieved from http://www.ias.org.uk/uploads/pdf/Price%20docs/538.pdf.
[27] Id. at Para 10.1.
[28] “Nordic Food Markets - a taste for competition”;
November 2005; retrieved from https://www.kkv.fi/globalassets/kkv-suomi/julkaisut/pm-yhteisraportit/nordic_food_markets.pdf.
[29] It varies between 82-90 per cent depending on the
country.
Article Information
ASSESSMENT OF BUYER POWER IN COMPETITION LAW: A BOON OR A THREAT
Authors: DR. GAGAN DEEP KOUR
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/05/22
- Issue 7
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International Journal for Legal Research and Analysis
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