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Two-Part Tariffs versus Linear Pricing between Manufacturers and Retailers: Empirical Tests on Differentiated Products Markets

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  • Bonnet, Céline
  • Dubois, Pierre
  • Simioni, Michel

Abstract

We present a methodology allowing to introduce manufacturers and retailers vertical contracting in their pricing strategies on a differentiated product market. We consider in particular two types of non linear pricing relationships, one where resale price maintenance is used with two part tariffs contracts and one where no resale price maintenance is allowed in two part tariffs contracts. Our contribution allows to recover price-cost margins from estimates of demand parameters both under linear pricing models and two part tariffs. The methodology allows then to test between different hypothesis on the contracting and pricing relationships between manufacturers and retailers in the supermarket industry using exogenous variables supposed to shift the marginal costs of production and distribution. We apply empirically this method to study the market for retailing bottled water in France. Our empirical evidence shows that manufacturers and retailers use non linear pricing contracts and in particular two part tariffs contracts with resale price maintenance. At last, thanks to the estimation of the our structural model, we present some simulations of counterfactual policy experiments like the change of pricing policies from two part tariffs to linear pricing between manufacturers and retailers, or the change of ownership of some products between manufacturers.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 370.

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Date of creation: Jun 2004
Date of revision: Apr 2006
Handle: RePEc:ide:wpaper:3553

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  1. Villas-Boas, Sofia B., 2006. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt0z26d2v9, Department of Agricultural & Resource Economics, UC Berkeley.
  2. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  3. Pinkse, Joris & Slade, Margaret E., 2004. "Mergers, brand competition, and the price of a pint," European Economic Review, Elsevier, vol. 48(3), pages 617-643, June.
  4. Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
  5. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  6. Patrick Rey & Thibaud Verge, 2002. "Resale Price Maintenance and Horizontal Cartel," The Centre for Market and Public Organisation 02/047, Department of Economics, University of Bristol, UK.
  7. Ivaldi, Marc & Verboven, Frank, 2005. "Quantifying the effects from horizontal mergers in European competition policy," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 669-691, December.
  8. Julie H. Mortimer, 2008. "Vertical Contracts in the Video Rental Industry -super-1," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 165-199.
  9. Liebowitz, S J, 1982. "What Do Census Price-Cost Margins Measure?," Journal of Law and Economics, University of Chicago Press, vol. 25(2), pages 231-46, October.
  10. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
  11. Douglas Rivers & Quang Vuong, 2002. "Model selection tests for nonlinear dynamic models," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 1-39, June.
  12. repec:bla:restud:v:75:y:2008:i:1:p:165-199 is not listed on IDEAS
  13. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(02), pages 185-213, April.
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Cited by:
  1. Walter Beckert, 2009. "Empirical analysis of buyer power," CeMMAP working papers CWP17/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Richards, Timothy J. & Acharya, Ram N. & 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.
  3. Symeonidis, George, 2010. "Downstream merger and welfare in a bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 28(3), pages 230-243, May.
  4. Inderst, Roman & Wey, Christian, 2005. "How Strong Buyers Spur Upstream Innovation," CEPR Discussion Papers 5365, C.E.P.R. Discussion Papers.
  5. Battigalli, Pierpaolo & Fumagalli, Chiara & Polo, Michele, 2007. "Buyer power and quality improvements," Research in Economics, Elsevier, vol. 61(2), pages 45-61, June.
  6. Villas-Boas, Sofia B, 2006. "An empirical investigation of the welfare effects of banning wholesale price discrimination," CUDARE Working Paper Series 1017R3, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised Oct 2008.
  7. Villas-Boas, Sofia B, 2007. "Using retail data for upstream merger analysis," CUDARE Working Paper Series 1030, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. Haucap, Justus & Heimeshoff, Ulrich & Klein, Gordon J. & Rickert, Dennis & Wey, Christian, 2013. "Inter-format competition among retailers: The role of private label products in market delineation," DICE Discussion Papers 101, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  9. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  10. Manuszak, Mark D., 2010. "Predicting the impact of upstream mergers on downstream markets with an application to the retail gasoline industry," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 99-111, January.
  11. Jrisy Motis, 2007. "Mergers and Acquisitions Motives," Working Papers 0730, University of Crete, Department of Economics.
  12. Dobson, Paul W. & Waterson, Michael, 2007. "The competition effects of industry-wide vertical price fixing in bilateral oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(5), pages 935-962, October.
  13. Philip G. Gayle, 2013. "On the Efficiency of Codeshare Contracts between Airlines: Is Double Marginalization Eliminated?," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 244-73, November.
  14. John Asker, 2004. "Diagnosing Foreclosure Due to Exclusive Dealing," Working Papers 04-36, New York University, Leonard N. Stern School of Business, Department of Economics.

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