food industry, if private labels are successful in quickly imitating new products, then
they can reduce rents and incentives to innovation. (Galizzi and Venturini, 2005).
Berges- Sennou et al. (2004) have pointed out that the development of private labels
could change the share of profits within vertical structures. A decrease of
manufacturers’ profits of the upstream producers could lead to less innovation. This
mechanism is reinforced by the strategy of retailers who develop 'me- too'‘products, a
strategy which can be seen as a substantial free- riding on research and development
of new products”
Buyer power may force food manufacturers to reduce investment in new products or
product improvements, advertising and brand building and as we have seen above,
this view is supported by official reports of the European Commission and the Federal
Trade Commission.
Significant recent advances in the analysis of buyer power have, however provided a
different view. There is now a small but growing theoretical literature which examines
formally the impact of buyer power on the incentives to innovate. Interestingly, Inderst
and Wey (2002) show that incentives for product improvement may actually increase
with more concentrated buyers. Inderst and Shaffer (2004) developed a model in which
retail mergers increase buyer power leading to a reduction in product variety and
social welfare. More recently, Inderst and Wey (2005), using the axiomatic approach to
bargaining theory show that the presence of buyer power need not necessarily reduce
suppliers incentives to innovate. To the contrary, it may increase upstream firms
incentives. This model, however, does not consider the existence of private labels and
delisting decisions along the lines developed by the above framework.
Weiss and Wittkopp (2003, 2005) find that buyer power reduces upstream incentives
to introduce new products in a sample of German food manufacturers. But,
interestingly, the authors also find that the negative effect of retailer’ s buyer power is
mitigated if manufacturers also have some market power. In their data, firms with a
large market share introduce a significantly higher number of product innovations.
The theoretical literature on competition and innovation is not clear about the effects
of competitive pressure on a firm’s incentive to invest in product innovations. Indeed,
competition may have both negative and positive effects on innovation incentives.
Recent research has focused on the crucial importance of the assumption about the
degree of firms (brands) heterogeneity. A clear theoretical prediction is that a rise in
competitive pressure reduces each firm’s profit level and makes it less attractive to
introduce a new product in an industry with symmetric firms. However, the realism of
the symmetry assumption may be questioned and with asymmetric firms the outcome
may be different. For example, Boone (2000) argued that a negative impact on
innovation is less likely in models with asymmetric firms in which the source of
asymmetry regards not only efficiency levels but also the firm’s positioning in the
product space. With his words, “if firms invest to explicitly position their products [...]
then a rise in pressure may make it profitable to move further away from the industry
standard” (p. 564). Boone (2001) shows that when firms are not symmetric, an increase
in intensity of competition does not necessarily lead to higher or lower profits for all
firms, but forces only the least efficient firms out of the market.
In summary, recent theoretical developments provide useful insights about the impact
of buyer power on upstream incentives. Interestingly, this literature does not support
the hypothesis of necessarily negative effects but suggest that the issue may be more