Pricing schemes in business-to-business (B2B) relationships reflect price discrimination and bargaining over rents. Bargaining outcomes are determined by upstream market power and countervailing buyer power downstream. This paper uses a panel of B2B transactions in the UK brick market to study B2B transaction prices. The empirical analysis identifies three effects on prices: nonlinear volume and freight absorption effects; countervailing power effects that arise from buyers’ local commercial significance; and competition effects that are due to the buyers’ local potential suppliers. And it shows that small buyers benefit more from competition than do large buyers because they are not constrained by the suppliers’ capacity.

Introduction

Since the early work of Galbraith (1952, 1954), countervailing power—or buyer power—has been an element of competition analysis. Competition authorities that investigate business-to-business (B2B) dealings treat it as a factor that can mitigate upstream market power. Prices in B2B relationships are complex. They may reflect countervailing power if the contracting counterparties bargain over rents, and they may also reflect nonlinearities, which possibly are due to some degree of price discrimination. This paper exploits a panel data set of the UK brick industry that comprises all transactions over the period 2001–۲۰۰۶ between the four main UK brick manufacturers and their customers. It studies the effects of countervailing power and price discrimination on ‘‘ex-works’’ brick prices at the transaction level. Customers in the brick market are heterogeneous, in terms of their size, geographic spread and position in the construction industry supply chain. While related structural work (Beckert et al. 2016) focusses on one specific customer segment, this study uses the entire data set of transactions with all customers and embeds the heterogeneity of buyer-seller relationships in a reduced-form empirical model of prices. The empirical approach to model transaction prices that is advocated in this paper exploits the full richness of the data. It is neither limited to a market segment that is defined by a subset of buyers, nor by the restrictions that are imposed by a structural model. It can serve practitioners as an initial screen: to test an antitrust market definition and to provide an indicative competitive assessment for an entire market. The empirical model builds on existing theoretical results from the bilateral bargaining (Horn and Wolinsky 1988; Inderst and Wey 2003; Stole and Zwiebel 1996) and nonlinear pricing and price discrimination literatures (Katz 1987; Stigler 1949; Thisse and Vives 1988). Because transportation costs are significant in this high weight-to-value industry, features of local demand and supply play an important role. The model distinguishes the effect of countervailing power—which results from the buyer’s local bargaining weight vis-a`-vis the selected manufacturer—from that of the buyer’s local outside options. The latter depend on the set of manufacturers with whom a buyer has established transactional relationships and from which the buyer selects the local supplier for a transaction.