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Stiff Competition: Vertical Relationships in Cremation Services

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  • Lori Parcel

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    (Department of Economics, Stanford University)

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    Abstract

    I examine the relationship between retail market competition and wholesale contracting patterns, by analyzing subcontracting behavior of funeral homes (retailers) and crematories (wholesalers) in the Minnesota funeral industry. Exploiting detailed data on wholesale and retail quantities, subcontracting patterns, consumer and establishment locations, and retail pricing, I estimate a model that predicts pricing, consumer funeral home choice, and vertical relationships between funeral homes and crematories. I find that funeral homes seeking wholesale cremation services are significantly less likely to subcontract with crematories belonging to firms that are direct retail market competitors. The estimated aversion to subcontracting with competitors is greater for funeral homes with fewer proximate crematories. This is consistent with foreclosure by integrated crematories. Counterfactual analysis indicates that funeral homes with few crematories nearby (that are owned by retail competitors) bear additional costs ranging from $161 to $203 per body on average, or seven to nine percent of the retail price. Half of this cost impact is transmitted to consumers, resulting in a four percent retail price increase in these markets on average.

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    Bibliographic Info

    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 07-041.

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    Date of creation: Mar 2008
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    Handle: RePEc:sip:dpaper:07-041

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    Related research

    Keywords: Vertical integration; competitive market; retail market; wholsesale market;

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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.:
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    1. Ali Hortacsu & Chad Syverson, 2008. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," Working Papers 08-41, Center for Economic Studies, U.S. Census Bureau.
    2. Justine S. Hastings & Richard J. Gilbert, 2005. "MARKET POWER, VERTICAL INTEGRATION AND THE WHOLESALE PRICE OF GASOLINE -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 469-492, December.
    3. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
    4. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, vol. 99(1), pages 393-430, March.
    5. Anderson, Simon P. & de Palma, Andre, 1999. "Reverse discrete choice models," Regional Science and Urban Economics, Elsevier, vol. 29(6), pages 745-764, November.
    6. Chad Syverson, 2004. "Market Structure and Productivity: A Concrete Example," NBER Working Papers 10501, National Bureau of Economic Research, Inc.
    7. Judith Chevalier & Fiona Scott Morton, 2006. "State Casket Sales and Restrictions: A Pointless Undertaking?," NBER Working Papers 12012, National Bureau of Economic Research, Inc.
    8. Tasneem Chipty, 2001. "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry," American Economic Review, American Economic Association, vol. 91(3), pages 428-453, June.
    9. Tay, Abigail, 2003. " Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
    10. Harrington, David E & Krynski, Kathy J, 2002. "The Effect of State Funeral Regulations on Cremations Rates: Testing for Demand Inducement in Funeral Markets," Journal of Law and Economics, University of Chicago Press, vol. 45(1), pages 199-225, April.
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    Cited by:
    1. Thierry Blayac & Patrice Bougette & Christian Montet, 2014. "How consumer information curtails market power in the funeral industry," European Journal of Law and Economics, Springer, vol. 37(3), pages 421-437, June.

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