A Dynamic Theory of Countervailing Power

Abstract

In this article I develop a model of an infinitely repeated procurement auction with one buyer and several sellers. The buyer can accumulate a backlog of unfilled orders which, similar to a boom in demand, forces the sellers to collude on a low price to prevent undercutting. If the buyer’s cost of shifiing its consumption over time is low enough, then the extent of collusion is bounded away from the joint-profit-maximizing level even for discount factors approaching one. The model is extended to allow for multiple buyers. Large buyers are shown to obtain lower prices from the sellers. Buyer mergers increase pro~t for all buyers, not just the merging pair, at the expense of the sellers. In contrast, buyer growth through addition harms buyers that do not grow and benefits sellers.