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Strategic Vertical Pricing in the U.S. Butter Market

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Author Info
Du, Ying
Stiegert, Kyle
Abstract

This article develops a methodology for empirically analyzing vertically strategic interactions in a multi-level supply channel. The model is used to analyze the vertical channel for U.S. butter manufacturing and retailing. Aggregating products to the firm level and using a nonlinear AIDS demand system under alternative strategic pricing assumptions is estimated using full information maximum likelihood (FIML) for seven geographic markets from 1998-2002. The market demand for butter was found to very price elastic. Furthermore, cross price elasticities between private labels and the two large national brands were also very elastic. The selected market structure was one indicating category profit maximization of national brands (separate from private label) at the retail level, Vertical Nash competition in the vertical channel, and Bretrand competition at the manufacturing level. Our results strongly suggest that the retail market for food products is impacted by the underlying vertical structure. The study provides useful measures of imperfect competition in the retail manufacturing sector.

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Publisher Info
Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 51712.

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Date of creation: Jun 2009
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Handle: RePEc:ags:aaea09:51712

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Related research
Keywords: Vertical interaction; market structure; strategic pricing; market power; AIDS model; butter.; Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization; L13; L22; L66;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June. [Downloadable!] (restricted)
  2. Cotterill, Ronald W & Putsis, William P, Jr & Dhar, Ravi, 2000. "Assessing the Competitive Interaction between Private Labels and National Brands," Journal of Business, University of Chicago Press, vol. 73(1), pages 109-37, January. [Downloadable!] (restricted)
  3. Suzuki, Nobuhiro & Kaiser, Harry M., 1997. "Imperfect Competition Models And Commodity Promotion Evaluation: The Case Of U.S. Generic Milk Advertising," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 29(02), December. [Downloadable!]
  4. Ronald Cotterill & William Putsis, 2000. "Market Share and Price Setting Behavior for Private Labels and National Brands," Review of Industrial Organization, Springer, vol. 17(1), pages 17-39, August. [Downloadable!] (restricted)
  5. Tirtha Dhar & Jean-Paul Chavas & Brian W. Gould, 2003. "An Empirical Assessment of Endogeneity Issues in Demand Analysis for Differentiated Products," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 85(3), pages 605-617, 08. [Downloadable!] (restricted)
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  6. Cotterill, Ronald W. & Putsis, William P., Jr. & Dhar, Ravi, 2000. "Market Share and Price Setting Behavior For Private Labels and National Brands," Research Reports 25209, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
  7. K. Sudhir & Vrinda Kadiyali & Vithala R. Rao, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Yale School of Management Working Papers ysm229, Yale School of Management. [Downloadable!]
  8. Cotterill, Ronald W. & Putsis, William P., 1998. "Testing the Theory: Vertical Strategic Interaction and Demand Functional Form," Research Reports 25211, University of Connecticut, Food Marketing Policy Center. [Downloadable!]
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This page was last updated on 2009-12-11.

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