When a Few Providers Dominate a Market: Consequences for Small Firms

Why market power hits small businesses from both sides

A food manufacturer with 40 employees negotiates with four retail groups. A trade business buys materials from two large wholesalers. A component supplier delivers three quarters of its parts to one carmaker. An online retailer sells almost exclusively through one platform. All four face a market in which a few large companies set the terms. For owners, this is not an abstract competition issue but a question of margin and independence.

This article therefore asks: What are the consequences for small customers and suppliers when a few providers or buyers dominate a market, and how can a small business strengthen its position? To answer it, we first clarify the terms and how concentration is measured, introduce the model of bargaining power, look at findings and a documented example, weigh two views, and finally derive a check of your own position.

Oligopoly, oligopsony, and how concentration is measured

An oligopoly is a market in which a few large providers account for most of the supply. The counterpart on the demand side is called an oligopsony: a few large buyers purchase most of the goods. Small businesses encounter both. As customers, they buy from a few large suppliers, for example for energy, software, or certain raw materials. As suppliers, they sell to a few large buyers, such as retail chains or corporations.

The common measure of concentration is the Herfindahl-Hirschman Index (HHI). You take the market shares of all providers in percent, square them, and add up the results. A single provider with 100 percent gives 10,000 points; many small providers give a value close to zero. Since their 2023 merger guidelines, US competition authorities classify markets as highly concentrated from 1,800 points. The Big Four shows how the measure works for the audit market of large corporations.

In practice, the index is only a pointer. It says nothing about whether the large providers actually exercise power. A market with four large retailers can be very competitive if they fight hard for customers. For a supplier, however, another question counts: how many buyers does it actually have to choose from?

The thinking model: bargaining power according to Porter

In his model of competitive forces, Michael Porter describes, among other things, the bargaining power of suppliers and buyers. Buyers are strong when they are few and large, when they can easily switch to another provider, and when the product purchased is interchangeable for them. Suppliers are strong when there are only a few of them, when their product is important to the customer, and when switching to another supplier would be expensive or lengthy.

The core of the model can be condensed into one question: Who can switch more easily? Size alone does not decide. A large retailer that can only get a certain specialty item from one manufacturer is weaker in this relationship than its size suggests. A small manufacturer whose goods can be replaced by ten others, by contrast, negotiates from a weak position, even with small retailers.

An everyday analogy: in a village with a single gas station, the operator sets the price as long as the next station is half an hour away. If a second one opens on the bypass, the situation changes immediately, even if it is smaller. What counts is not the size of the station but the distance to the alternative.

Bargaining power is not a question of size, but of the ability to walk away.

A documented example: food retail

German food retail is the best-known example of buyer power. In its 2014 sector inquiry, Germany's Federal Cartel Office (Bundeskartellamt) found that Edeka, Rewe, the Schwarz Group, and Aldi together accounted for around 85 percent of sales and purchasing. Many manufacturers could not easily switch to other buyers, which could lead to abuses of buyer power. Concentration has risen further since then. According to information from the proceedings on Edeka's takeover of Tegut stores, the four groups accounted for over 90 percent of nationwide sales in 2025.

The Federal Cartel Office cleared the takeover in September 2026 after Edeka reduced the number of stores from 202 to 178 and committed not to take over 24 sites for four years. The authority did not find collective dominance by the leading companies. This shows the limit of competition law from a small supplier's perspective: high concentration is not prohibited. Only abuse is prohibited, and someone has to prove it.

What research says about the consequences of market power

At the macroeconomic level, De Loecker, Eeckhout, and Unger (2020) showed for the US that companies' average markups over marginal cost have risen from 21 to 61 percent since 1980. How this happened is remarkable: the median remained unchanged; it was mainly markups at the top that rose, and market share shifted to companies with high markups. For Europe, Weche and Wambach (2021), both then working for Germany's Monopolies Commission, found a sharp drop in markups during the financial crisis followed by a renewed rise, with large differences between countries.

For suppliers, the demand side is more important. In a legal analysis using the examples of Uber and Amazon, Cheng (2022) distinguishes three forms of buyer power: classic monopsony, meaning a dominant buyer; bargaining power in all-or-nothing negotiations; and a retailer's power as gatekeeper to the customer. Among the possible harms he names the so-called waterbed effect, in which a powerful buyer obtains better terms and smaller buyers worse ones in return, eroding quality, and increasing concentration in the supply chain.

Oliveira and Kadapakkam (2021) examined how suppliers themselves react, using US companies whose important customer merged with a competitor. The suppliers subsequently increased their debt permanently. The authors interpret this as a bargaining strategy: anyone who has high interest payments to make has less room to give away and can negotiate harder. For suppliers with their own market power, the effect was weaker. For a small business, this is no recommendation to take on debt, but an indication that even large suppliers feel the power of concentrated customers.

Two views: avoid dependence or use proximity?

Both strategies are common and can work. The first protects against the arbitrariness of a single partner but costs growth and often margin too, because small customers are more expensive to serve. The second brings volume and sometimes real partnership but exposes the business to the risk that terms change suddenly after a change in purchasing staff or a merger of the customer.

I consider a mix to be the more robust answer: become indispensable where possible, and at the same time make sure that no single partner accounts for more than a quarter of revenue. Concentration risk describes this rule of thumb. The same logic applies to platforms, as Dependence on platforms shows. Regulation as a competitive factor discusses how rules themselves can shift market power.

The switching check for your position

From Porter's model I derive a check that I call the switching check. It measures your own bargaining position toward a powerful customer or supplier in four figures.

1. Determine the revenue share

   What percentage of your revenue depends on this partner, or what percentage of your purchasing? Above 25 percent is a warning sign.

2. Estimate the replacement time

   How many months would you need to replace the revenue or the supply if the partner pulled out tomorrow?

3. Count the alternatives

   How many other buyers or suppliers are realistic options that you could win in that time?

4. Assess the partner's switching costs

   What does it cost the partner to replace you: time, qualifying a new supplier, risk? The higher, the stronger your position.

In the worked example, the relationship with customer A is difficult not because of the size of the retail chain, but because the supplier can hardly switch while the customer can at any time. With customer B, it is the other way around. The consequence for A: raise the customer's switching costs, for example through specialization or additional services, and at the same time reduce the revenue share. Specialization instead of a general store describes how specialization reduces interchangeability, and Expressing customer value in euros how to express the value of your service to the customer in euros.

Conclusion: not the partner's size decides, but the ability to switch

To the guiding question: when a few companies dominate a market, terms shift to the detriment of small customers and suppliers, through price rounds, payment terms, unilateral contract changes, and new obligations. Food retail shows how high concentration can become without competition law intervening, because concentration alone is not prohibited. Research confirms that market power has risen in many economies and that it can be passed down the supply chain.

For a small business, this does not mean powerlessness. According to the model of bargaining power, what decides is who can switch more easily. This can be influenced: through a limited revenue share per partner, through services that are hard to replace, and through knowing your own floor. If you know your ability to switch, you negotiate more soberly, even with a partner a hundred times larger.

• Do the switching check for every partner with more than 15 percent of revenue or purchasing.
• Draw up a reduction plan for any share above 25 percent.
• Identify services that raise the partner's switching costs.
• Record terms, notice periods, and payment terms in writing.