Introduction

The problem

In recent years, public discussion concerning large retailers and their suppliers has been growing in intensity. It is often claimed that large retailers are endowed with overwhelming bargaining power and that they abuse this power in their relations with suppliers. New regulations have already been introduced and new regulatory initiatives are often proposed. This work formulates and tests an alternative hypothesis, according to which large retailers efficiently perform a function similar to that of a court of first instance, that is, they act as second-party enforcers in their relationships with suppliers.

The empirical analysis is consistent with the argument that, in order to perform this function, large retailers exercise a set of implicit and explicit rights to “complete” or fill the gaps in the contract, to evaluate their own and the other party's performance and to impose due sanctions. Safeguards against opportunistic behavior in the performance of these quasi-judicial functions follow directly from the retailers' own interest in maintaining their reputation and the relationship with the suppliers, and in continuing to perform the double role of judge and interested party. It is rarely optimal, however, to eliminate opportunism completely. In retailing, failures in safeguards arise especially when the retailer's time horizon is unexpectedly shortened or his decentralized decisions are imperfectly controlled. Regarding these residual and potentially efficient distortions, it is claimed that regulation could hardly provide better incentives than market competition.

The chapter pays special attention to the most problematical aspects of the relationship between suppliers and retailers: the duration of the payment period, payment delays, and the revision of the clauses before the end of the contract term.