Printed in the Business Monday January 31st, 2011
It is an almost certainty that if you purchase two oranges in Bridgetown today that you will end up paying more for each orange than the person who purchases 25 oranges at a time.
Large buyers more often than not tend to obtain discounts from their suppliers, while smaller buyers generally do not. A reason for this is that the cost of serving a large buyer is often less, because serving a large buyer usually involves smaller unit distribution costs than serving several small ones. In addition because of increasing returns to scale (as more is produced the unit cost of production decreases) it is cheaper per unit to supply more.
Often because of these circumstances large buyers will be in a position
to bargain for discounts or special terms from suppliers.
Theoretically this concept is termed “countervailing power”, a term introduced by the American economist, John Kenneth Galbraith in 1952. The concept suggests that large buyers possess a degree of power to influence price and this is so even in highly concentrated markets where the welfare of consumers appears to be totally in the hands of a few suppliers. The concept can be explained by firms merging or banding together thereby acting like the large buyer to trade in large volumes in order to influence price.
Countervailing buying power is considered especially critical in monopoly and highly concentrated or oligopolistic markets (that is, markets controlled by a few large suppliers), because in markets such as these there is often limited price competition. Introducing low prices in highly concentrated markets is often of limited benefit because suppliers are so aware of their competitor’s pricing policy that they can react almost immediately to any price reductions. Without the sufficient pressures of competition to drive prices to their most economic levels in these markets, the power of the large buyer becomes priceless. Countervailing buyer power is latent in every market. It is also particularly potent and is one way of helping these markets to operate competitively while yielding economic prices.
In small developing countries like Barbados, there are several highly concentrated markets. In fact most markets supplying essential goods are either monopolies or served by a few large firms, for instance the commercial banking industry, the mobile telecommunications industry and the food distribution industry. These are all markets serviced by a few large suppliers. These are also markets where customer satisfaction is low in regard to prices. Ironically in these and other similar markets there has been little effort to embrace the philosophy of countervailing buyer power or to mobilise the substantial power of the collective consumer acting like the large buyer to ensure the delivery of economic prices.
Countervailing buyer power is exercised through the consumers acting as a group, realising their strength and exercising that strength. They do this by patronising selectively while demanding excellence in quality and price. Studies done in countries such as South Africa, the United States of America, and the United Kingdom show that the inflexibility of consumers or their sluggishness in switching between suppliers contributes to a limited level of competition. The studies also suggest that a lack of information on the part of consumers accounts for their reluctance to exercise their collective power. These studies invariably recommend that institutions needed to disclose information in a manner which would allow consumers to more readily compare prices of financial products.
As we in Barbados continue to debate the issue of prices, we continue to underutilise the latent yet potent power that lies within these groups. These groups acting collectively through their various representative associations can contribute to the process of competition within several markets, especially where the limited number of suppliers does not accommodate effective price competition. In other words, it is necessary that these groups become organised to utilise their power.