Can powerful buyers “exploit” SME suppliers?

Abstract

Purpose The purpose of this paper is to examine the relationship between SME suppliers and large buyers, and so better inform competition policy in cases where market power resides with buyers. Design/methodology/approach The theories of monopsony and oligopsony are applied to intermediate markets to set out a model of profit appropriation by large buyers from small suppliers. The main focus of the illustrative examples used is on the relationship between supermarkets and their suppliers. Findings The authors' main prediction is that powerful buyers are able to “exploit” SME suppliers by restricting their number, the price paid to individual suppliers and the quantity purchased from each supplier. Practical implications Governments seek to encourage small businesses because of their ability to generate innovation and create future growth opportunities. Any investigations of the continued growth of buyer power in intermediate markets should consider the effects not only upon consumer welfare but also upon the welfare of the SME sector. Governments may wish to counteract monopsonistic markets as they may inhibit SMEs that could otherwise provide innovation and growth within the economy. Originality/value This model gives a theoretical framework to analyse the interaction between small suppliers and large buyers. Furthermore, it may provide a counter to the argument that low consumer prices are the sole legitimate aim of competition policy.