Countervailing Power with Large and Small Retailers

When concentration in the retail market increases, retailers gain more market power towards the suppliers and they hence can achieve better wholesale prices. In the 1950s, Galbraith introduced the concept of countervailing power claiming that lower wholesale prices will pass on to consumer as lower retail prices. Consequently higher concentration may turn out to be beneficial for consumers. In this model where a monopolistic supplier sells an intermediate good to M large retailers who are Cournot competitors and a competitive fringe consisting of N retailers, we show that higher concentration does not decrease retail prices and results solely to a reallocation of profits between the supplier and large retailers, thus invalidating Galbraith’s conjecture. The same result carries on when the exogenously given level of bargaining power of large retailers increases.