Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
Low prices paid by large exporters to their many small suppliers raise concerns about unequal distribution of gains from exporting. However, when input or complementary markets (e.g., insurance, credit) function poorly, buyers (exporters) adopt contractual and organizational strategies that shape prices beyond standard buyer power markdowns. This paper quantifies how these two firm responses to input market imperfections generate distinct sources of buyer power. First, contracts create surplus by mitigating frictions (e.g., providing insurance or credit); then, low prices reflect buyer power over surplus created. Second, partial vertical integration enables surplus capture through threats to replace suppliers with in-house production. While buyer power both over surplus created and from surplus capture can lower prices, their distributional implications differ: only surplus creation aligns incentives for contracts to mitigate frictions. I estimate a structural bargaining model to decompose prices into surplus creation and capture using proprietary data on the universe of fabric purchases by a large Indian garment exporter. Estimates highlight that buyer power over surplus creation from insurance-like contract terms, not from surplus capture, explains low prices; the buyer retains ~60% of surplus created. Counterfactuals illustrate that introducing a missing profit insurance product raises prices paid to small risk-averse suppliers, but increasing buyer competition has limited effects.