A DYNAMIC THEORY OF COUNTERVAILING POWER

In this article I develop a model of an infinitely repeated procuremen t auction with one buyer and several sellers. The buyer can accumulate a backlog of unfilled orders which, similar to a boom in demand, forc es the sellers to collude on a low price to prevent undercutting. If t he buyer's cost of shifting its consumption over time is low ene ugh, then the extent of collusion is bounded away from the joint-profit-max imizing level even for discount factors approaching one. The model is extended to allow for multiple buyers. Large buyers are shown to obtai n lower prices from the sellers. Buyer mergers increase profit for all buyers, not just the merging pair, at the expense of the sellers. In contrast, buyer growth through addition harms buyers that do not grow and benefits sellers.