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Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data

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Author Info
SOFIA BERTO VILLAS-BOAS

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Abstract

In this paper, different models of vertical relationships between manufacturers and retailers in the supermarket industry are compared. Demand estimates are used to compute price-cost margins for retailers and manufacturers under different supply models when wholesale prices are not observed. The purpose is to identify the set of margins compatible with the margins obtained from estimates of cost and to select the model most consistent with the data among non-nested competing models. The models considered are (1) a simple linear pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios that allow for collusion, non-linear pricing, and strategic behaviour with respect to private label products. Using data on yogurt sold in several stores in a large urban area of the U.S. the results imply that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers or high bargaining power of the retailers. Copyright 2007 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2007.00433.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 74 (2007)
Issue (Month): 2 (04)
Pages: 625-652
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Handle: RePEc:bla:restud:v:74:y:2007:i:2:p:625-652

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  1. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A framework for identifying the sources of local currency price stability with an empirical application," Staff Reports 287, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. Bonnet, CéLine & Dubois, Pierre & Villas Boas, Sofia B., 2009. "Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through," IDEI Working Papers 565, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  3. Nakamura, Emi & Zerom, Dawit, 2008. "Accounting for Incomplete Pass-Through," MPRA Paper 14389, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Horst Raff & Nicolas Schmitt, 2008. "Buyer Power in International Markets," Kiel Working Papers 1431, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  5. Michaela Draganska & Daniel Klapper & Sofia Villas-Boas, 2008. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1046, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
    Other versions:
  6. Kristin Kiesel & Sofia Villas-Boas, 2007. "Got Organic Milk? Consumer Valuations of Milk Labels after the Implementation of the USDA Organic Seal," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1024, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
  7. Peter Berck & Jennifer Brown & Jeffrey Perloff & Sofia Villas-Boas, 2007. "Sales: Tests of Theories on Causality and Timing," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1031, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
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  8. Sofia Villas-Boas, 2008. "An Empirical Investigation of the Welfare Effects of Banning Wholesale Price Discrimination," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series 1017, Department of Agricultural & Resource Economics, UC Berkeley. [Downloadable!]
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  9. Morten Overgaard Ravn & Stephanie Schmitt-Grohe & Martin Uribe, . "Incomplete Cost Pass-Through Under Deep Habits," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics. [Downloadable!] (restricted)
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  10. Reisinger, Markus & Schnitzer, Monika, 2008. "A Model of Vertical Oligopolistic Competition," Discussion Papers in Economics 3189, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
  11. George Symeonidis, 2009. "Downstream merger and welfare in a bilateral oligopoly," Economics Discussion Papers 671, University of Essex, Department of Economics. [Downloadable!]
  12. Walter Beckert, 2009. "Empirical analysis of buyer power," CeMMAP working papers CWP17/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies. [Downloadable!]
  13. Richards, Timothy J. & Acharya, Ram & Molina, Ignacio, 2009. "Retail and Wholesale Market Power in Organic Foods," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49329, Agricultural and Applied Economics Association. [Downloadable!]
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