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Price and Brand Competition between Differentiated Retailers: A Structural Econometric Model

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  • Dubois, Pierre
  • Jodar Rosell, Sandra

Abstract

We develop a model of competition between retailer chains with a structural estimation of the demand and supply in the supermarket industry in France. In the model, supermarkets compete in price and brand offer over all food products to attract consumers, in particular through the share of private labels versus national brands across all their products. Private labels can serve as a differentiation tool for the retailers in order to soften price competition. They may affect the marginal costs of all products for the retailer because of eventual quality differences and also by helping retailers to obtain better conditions from their manufacturers. Differentiation is taken into account by estimating a discrete-continuous choice model of demand where outlet choice and total expenditures are determined endogenously. On the supply side, we consider a simultaneous competition game in brand offer and price between retailers to identify marginal costs. After estimation by simulated maximum likelihood, the structural estimates allow to simulate the effect on the equilibrium behavior of retailer chains of a demand shock through an increase in transportation costs for consumers and a merger between two retailer chains.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7847.

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Date of creation: Jun 2010
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Handle: RePEc:cpr:ceprdp:7847

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Keywords: competition; discrete/continuous choice; retailing; structural estimation;

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References

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  1. Marie-Laure Allain & Claire Chambolle, 2004. "Loss-leaders Banning Laws as Vertical Restraints," Working Papers 2004-19, Centre de Recherche en Economie et Statistique.
  2. Céline Bonnet & Pierre Dubois, 2010. "Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 139-164.
  3. André Bonfrer & Pradeep K. Chintagunta, 2004. "Store Brands: Who Buys Them and What Happens to Retail Prices When They Are Introduced?," Review of Industrial Organization, Springer, vol. 24(2), pages 195-218, 03.
  4. Hanemann, W Michael, 1984. "Discrete-Continuous Models of Consumer Demand," Econometrica, Econometric Society, vol. 52(3), pages 541-61, May.
  5. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
  6. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-28, Fall.
  7. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March.
  8. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  9. Michaela Draganska & Dipak C. Jain, 2005. "Product-Line Length as a Competitive Tool," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 1-28, 03.
  10. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  11. Bontemps Christophe & Orozco Valerie & Réquillart Vincent & Trevisiol Audrey, 2005. "Price Effects of Private Label Development," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 3(1), pages 1-18, February.
  12. K. Sudhir & Debabrata Talukdar, 2004. "Does Store Brand Patronage Improve Store Patronage?," Review of Industrial Organization, Springer, vol. 24(2), pages 143-160, 03.
  13. Bontemps, Christophe & Orozco, Valérie & Réquillart, Vincent, 2008. "Private Labels, National Brands and Food Prices," IDEI Working Papers 402, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Patrick REY & Thibaud VERGE, 2009. "Resale Price Maintenance and Interlocking Relationships," Working Papers 2009-11, Centre de Recherche en Economie et Statistique.
  15. Bontems, Philippe & Monier-Dilhan, Sylvette & Requillart, Vincent, 1999. "Strategic Effects of Private Labels," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 26(2), pages 147-65, June.
  16. Bergès-Sennou Fabian & Bontems Philippe & Réquillart Vincent, 2004. "Economics of Private Labels: A Survey of Literature," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 2(1), pages 1-25, February.
  17. Howard Smith, 2004. "Supermarket Choice and Supermarket Competition in Market�Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 235-263, 01.
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Citations

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Cited by:
  1. Stéphane Turolla, 2012. "Spatial competition in the French supermarket industry," Working Papers SMART - LERECO 12-01, INRA UMR SMART.
  2. Smith, Howard & Thomassen, Øyvind, 2012. "Multi-category demand and supermarket pricing," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 309-314.

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