Buyer and Supplier Power Flashcards
(28 cards)
Why are buyer and supplier power often mentioned together?
Because they utilise the same area of economic theory, but they consider TWO independent transactions, hence they are TWO different forces
How do buyer and supplier relationships pervade our everyday life?
every market transaction involves a buyer and a seller. Production of goods/services fundamentally involve buying factors or production and then combining them to produce something more valuable which is then sold.
What is a supply chain?
is the sequence of adjacent stages of production involved in the creation of most goods. The supply chain begins with the primary extraction/manufacture of initial inputs and eventually arrives at the sale of final goods to end consumers.
Not all stages are done my one organisation, so firms must engage in a range of transactions - but vertical integration exists.
What do firms in vertically adjacent stages of production do?
They regulalrt must reach agreement over their terms of business. Often firms preference in these negotiations are in direct opposition.
What to sells and buyers want?
Sellers want highest price and buyers want lowest price. for example, Marmite Shortage in Tesco due to them being in a price row with Unilever.
The profit a firm makes = total revenue - total costs.
What is buyer and supplier power?
Buyer power is people who buy from our industry.
Supplier power is the business from which we get are products/services from to supply the industry.
Buyer or supplier power can both constrain profitability.
What do strong suppliers do?
if strong suppliers can improve the value of their sales, then the buying’s industry’s costs rise, and thus its profitability falls.
How can powerful suppliers secure more of the value (surplus) of a transaction?
- charging higher prices
- shifting costs towards those buyng the good
- limiting quality or services - offering less for the same price
What do strong unions threaten?
The profitability of labour intensive businesses (e.g. uni lecturers) or oil price rises threaten the profitability of companies like airlines, leading to lower profits as costs rise.
Firms face a non-trivial trade of between setting a higher price and having lower sales.
What do powerful buyers do?
if powerful buyers can improve the terms on which they purchase their input then the selling industry revenue falls and thus do profits.
How can powerful buyers secure more of the value of a transaction by?
- Forcing down prices e.g. supermarkets only paying for products from farmers for a lower price.
- Demanding better quality or more services
- Shifting costs e.g. supermarket power over many agricultural products, tobacco companies, power over tobacco leaf farmers
What are the determinants of bargaining power?
The driving force behind buyer and supply are the bargaining power industry participants have.
1. Relative concentration
2. Nature of good traded
3. Threat of vertical integration
4. Asset specificity
What is relative concentration?
number and relative size of agents involved in bargaining power has a big impact - size brings market power.
What happens if a buying industry is highly concentrated?
This creates buyer power (monopoly). Buyers can pick and choose among the suppliers available to get the best deal possible. for example supermarkets power over agricultural sectors - few markets and many diary farmers.
What happens if the selling industry is highly concentrated compared to the buying industry?
This creates seller power (monopoly). Suppliers can pick and choose among buyer to get best deal. e.g. supermarkets and consumers with recent price inflation.
What are the different outcomes of relative concentration?
- few buyers, few suppliers = mutual dependence
- few suppliers, many buyers = monopoly power
- many suppliers, few buyers = monopsony power
- many suppliers, many buyer = competitive
What is nature of good traded?
How much PD is there? Is the good homogenous or heterogenous? Are there close substitutes?
What happens if the good is homogenous and there are close substitutes?
This favours buyer power especially if there are many suppliers e.g. sugar vs other sweeteners (honey, syrup etc)
What happens if the good is differentiated and there are few/no close substitutes?
Then sellers will be able to extract seller power e.g. supply of unique life saving medicine can increase prices above inflations because they offer unique products.
Why does uniqueness of a product matter?
It matters but also interacts with ease with which firms can switch between products - will it cost buyers to switch supplier? Will it cost supplier to switch buyers?
What is threat of vertical integration?
occurs when several stages of supply chain are done by a single business. Vertical integration avoids market transactions - no negotiation necessary
What happens if suppliers forward integrate?
integrate by producing buyers products which removes the need for buyers
What happens if buyers backward integrate?
integrate by producing inputs, then they remove the needs of needs of suppliers. The threat of such integration is often effective
What is tapered integration?
Practice of maintaining a smaller level of self produced inputs and buying the rest in from suppliers or selling some of their output directly but selling most to other firms.
Allows firms to preserve threat of manufacturing key items/selling without a full commitment.
Firms will have high bargaining power if firms gain information about the production and retail process - if the internal manufacturing/retail operations retail can be easily expanded if required.
