Buyer Groups as a Strategic Commitment

Buyer cooperatives, buyer alliances, and horizontal mergers are often perceived as attempts to increase buyer power. Much theoretical and empirical work has emphasized that buyer size can increase buyer surplus. In contrast, I show that even an arbitrarily small buyer group, if it is composed of buyers with heterogeneous preferences, can increase price competition among rival sellers by committing to buy exclusively from a single seller. When there are two sellers, the grand coalition is a coalition-proof equilibrium. However, other equilibrium coalition structures exist with arbitrarily many buyer groups that generate the same buyer surplus. When there are n sellers, all coalition-proof equilibria have a minimum of n(n-1)/2 buyer groups (one for each pair of sellers).