When Does the Waterbed Effect Harm Consumers?
Abstract
Buyer power can produce a waterbed, where a powerful buyer pays less and its rival more. Does that harm consumers? When the discounted buyer is larger, its price reduction reaches more consumers. If retail prices respond more to own costs than rival costs, a one-for-one waterbed benefits consumers. Raising the rival's cost shifts sales from the supplier's higher-margin customer, so Hotelling, Cournot, and Bertrand do not even generate one-for-one. Buyer power therefore benefits consumers. The harm condition in Inderst and Valletti (2011) is never met. Under asymmetric Bertrand, harm requires the locally smaller buyer to receive the discount.
Key Insight
Canonical models never generate enough of a waterbed to harm consumers; under asymmetric Bertrand, harm requires discounting the smaller buyer, not the larger one.
Keywords
- waterbed effect
- buyer power
- bilateral oligopoly
- mergers
- vertical relations
Citation
Brian C. Albrecht (2026). "When Does the Waterbed Effect Harm Consumers?."
BibTeX
@article{waterbed_harm_consumers,
title = {When Does the Waterbed Effect Harm Consumers?},
author = {Brian C. Albrecht},
year = {2026},
url = {https://briancalbrecht.com/Albrecht-Waterbed-Harm-Consumers.pdf}
}