International Society of Primerus Law Firms

The Concept of Buyer Power

By Christine Njoki
Njoroge Regeru & Company
Nairobi, Kenya, Africa

The Competition (Amendment) Act No. 49 of 2016 (“the Amendment Act”) was enacted on the 23rd December, 2016 and came into force on the 13th of January 2017. This Amendment Act seeks to make various changes to the Competition Act (“the Principal Act”) by increasing the capability of the Competition Authority of Kenya’s to detect and take action upon an undertaking or undertakings found to be engaging in any anti-competitive behavior and introducing specified thresholds for financial penalties.

Notably, the Amendment Act introduced the concept of “buyer power”. The concept has been defined in the Act as “the influence exerted by an undertaking or group of undertakings in the position of a purchaser of a product or service to obtain from a supplier more favorable terms, or to impose a long term opportunity cost including harm or withheld benefit which, if carried out, would be significantly disproportionate to any resulting long term cost to the undertaking or group of undertakings.”

In 1981, a report by the Committee of Experts on Restrictive Business Practices of the Organization for Economic Co-operation and Development (OECD) defined buyer power as the situation that would exist as a result of the dominance or the strategic advantage of a firm or a group of firms, and thus ability to obtain more favorable terms than other buyers in that market. Generally speaking, buyer power is seen to present itself in three main scenarios. These are:

  1. The merger of two or more large buyers, into a single buyer.
  2. The conclusion of joint purchasing agreements whereby a purchaser agrees to buy and the seller on the other hand agrees to sell, under specified terms and conditions.
  3. The inducing of suppliers who largely depend on the dominant buyers to grant the dominant buyers unjustifiable advantage in the market over the others.

Buyer power can be categorized into two, namely; monopsony power and bargaining power. Both types will generally result in the lowering of input prices. An undertaking or undertakings are said to have monopsony power if they have market power in employing factors of production. Usually, there is only one buyer and many sellers in a monopsony. Bargaining power on the other hand is the ability of an undertaking or undertakings to exert their influence over others in a negotiation so as to achieve favorable conditions against them.

Buyer power becomes problematic if the stronger buyer also has selling power. This is because the impact of the buyer’s strength will be dependent upon whether the buyer will have seller power in the downstream market. Buyer power also brings about the reduction of innovation and/or innovation by the suppliers. This is because the suppliers are no longer empowered to realize the profits they would realize, if buyer power was on the minimum or eliminated completely.

Penalty

The penalty to be imposed under the new laws for an undertaking or group of undertakings found to be engaging in the abuse of buyer power shall be imprisonment for a term not exceeding five years or a fine not exceeding ten million Kenya shillings or both. The criterion to be used in the determination of buyer power has also been provided for and it shall be the nature and determination of contract terms, the payment requested for access infrastructure and the price paid to suppliers.

Conclusion

From the foregoing, it is clear that buyer power will especially be important in instances where an undertaking or a group of undertakings will have monopolistic/oligopolistic power, such as when there will be broadly competitive conditions on the supply side of the market and the supply curve will not be perfectly static. This is as a result of the ability of an undertaking or undertakings with buyer power to decrease the purchase prices or stimulate innovation in a given industry.


The general information contained herein is intended for informational purposes only. It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.

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