What are the power and the weakness of buyers?
The power of buyers is the impact that customers have on a producing industry. In general, when buyer power is strong, the relationship to the producing industry is near to what an economist terms a monopsony – a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality, few pure monopsonies exist, but frequently there is some asymmetry between a producing industry and buyers. The following tables outline some factors that determine buyer power.
Buyers are Powerful if:
- Buyers are concentrated – there are a few buyers with significant market share
- Buyers purchase a significant proportion of output – distribution of purchases or if the product is standardized
- Buyers possess a credible backward integration threat – can threaten to buy producing firm or rival
Buyers are Weak if:
- Producers threaten forward integration – a producer can take over own distribution/retailing
- Significant buyer switching costs – products not standardized and the buyer cannot easily switch to another product
- Buyers are fragmented (many, different) – no buyer has any particular influence on product or price
- Producers supply critical portions of buyers’ input – distribution of purchases