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Buyer-Size Discounts and Inflation Dynamics
Abstract
This paper considers the macroeconomic effects of retailers’ market concentration and buyer-size discounts on inflation dynamics. During Japan's “lost decades,” large retailers enhanced their market power, leading to increased exploitation of buyer-size discounts in procuring goods. We incorporate this effect into an otherwise standard New-Keynesian model. Calibrating to the Japanese economy during the lost decades, we find that despite a reduction in procurement cost, strengthened buyer-size discounts did not cause deflation; rather, they caused inflation of 0.1% annually. This arose from an increase in the real wage due to the expansion of production.
Introduction
In this paper, we aim to consider the macroeconomic effects of buyer-size discounts on inflation dynamics. It is the conventional wisdom that large buyers (downstream firms) are better bargainers than small buyers in procuring goods from sellers (upstream firms). Retailers, wholesalers, and manufacturers negotiate prices, taking account of trade size. The increase in sales of retail giants such as Wal-Mart in the United States, Tesco in the United Kingdom, and Aeon in Japan has been accompanied by the increase in their bargaining power over wholesalers and manufacturers. Figure 1 shows evidence that larger buyers enjoy larger price discounts in Japan. In 2007, the National Survey of Prices by the Statistics Bureau reported the prices of the same types of goods sold by retailers with differing floor space. For nine kinds of goods, from perishables to durable goods, retail prices decrease with the floor space of retailers. This suggests that large retailers purchase goods from wholesalers and manufacturers at lower prices than small retailers do. It is natural to think that these buyer-size discounts influence macro inflation dynamics.