Bargaining Power between Food Processors and Retailers: Evidence from Japanese Milk Transactions

Since the 1990s, several studies have pointed out that Japanese retailers exert buyer power over upstream firms in milk transactions (the buyer power hypothesis), despite the high level of competition between supermarkets and between milk suppliers. The conventional new empirical industrial organization approach, which assumes price-taking behavior on either side of players, is not appropriate for this market. Instead, we use the bilateral Nash bargaining model. Using purchase data for the period June 2012--December 2014, we estimate a structural bargaining model for each market in order to identify the relative bargaining strength of the respective agents. The results show that retailers tend to have stronger bargaining power than processors, even in the case of low market concentration. Therefore, these results support the buyer power hypothesis for wholesale milk transactions. In addition, we show the local small and medium-sized supermarkets have moderate bargaining power in the case of NB milk, whereas top-share supermarkets, discounters, and drugstores attempt almost take-it-or-leave-it offers. Finally, we identify the regional differences in the bargaining power of each brand and retailer, highlighting the differences for COOP milk in each region and in the market strategies of large supermarkets. Acknowledgement : I am grateful to Nao Koike for his kindness in providing me with the data used in this study. I would also like to thank Nobuhiro Suzuki for his support, and Takeshi Sato for his critical reviews of the first draft of this paper. Any errors or omissions are author's responsibility