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Market Structure and Cost Pass-Through in Retail

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  • Nicholas Li
  • Gee Hee Hong

Abstract

We examine the extent to which vertical and horizontal market structure can together explain incomplete pass-through. We develop a model that highlights the interactions between horizontal and vertical structure and their effects on pass-through from commodity to wholesale prices and wholesale to retail prices. Using scanner data from a large U.S. retailer, we estimate product level pass-through rates for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. We find that greater control of the value chain by the retailer results in higher commodity price pass-through into retail prices compared to national brands – 40% higher for private label manufactured goods and 10% higher for private label non-manufactured goods. We also find substantial effects of horizontal structure on pass-through – products and brands with higher market shares have higher retail markups and lower cost pass-through. Our results emphasize that accounting for both vertical and horizontal structure is important for understanding how market structure affects pass-through, as a reduction in double-marginalization can raise pass-through directly but can also reduce it indirectly by increasing market share.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-470.

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Length: Unknown pages
Date of creation: 14 Jan 2013
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-470

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Related research

Keywords: pass-through; market structure; market power; pricing; retail; vertical integration; intra-firm; private labels;

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References

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  1. Pol Antràs, 2003. "Firms, Contracts, and Trade Structure," NBER Working Papers 9740, National Bureau of Economic Research, Inc.
  2. Richard Pomfret & Patricia Sourdin, 2010. "Why do trade costs vary?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(4), pages 709-730, December.
  3. Peter Berck & Ephraim Leibtag & Alex Solis & Sofia Villas-Boas, 2009. "Patterns of Pass-through of Commodity Price Shocks to Retail Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1456-1461.
  4. Saxonhouse, Gary R, 1976. "Estimated Parameters as Dependent Variables," American Economic Review, American Economic Association, vol. 66(1), pages 178-83, March.
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  7. Raphael A. Auer & Raphael S. Schoenle, 2012. "Market structure and exchange rate pass-through," Globalization and Monetary Policy Institute Working Paper 130, Federal Reserve Bank of Dallas.
  8. Olivier Coibion & Yuriy Gorodnichenko & Gee Hee Hong, 2012. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications," IMF Working Papers 12/207, International Monetary Fund.
  9. Hellerstein, Rebecca & Villas-Boas, Sofia B., 2010. "Outsourcing and Pass-Through," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8098p5nq, Department of Agricultural & Resource Economics, UC Berkeley.
  10. Nicolas Berman & Philippe Martin & Thierry Mayer, 2012. "How do Different Exporters React to Exchange Rate Changes?," The Quarterly Journal of Economics, Oxford University Press, vol. 127(1), pages 437-492.
  11. Etienne Gagnon & Benjamin R. Mandel & Robert J. Vigfusson, 2012. "The hitchhiker's guide to missing import price changes and pass-through," International Finance Discussion Papers 1040, Board of Governors of the Federal Reserve System (U.S.).
  12. Pinelopi K. Goldberg & Rebecca Hellerstein, 2007. "A Structural Approach to Identifying the Sources of Local-Currency Price Stability," NBER Working Papers 13183, National Bureau of Economic Research, Inc.
  13. Neiman, Brent, 2010. "Stickiness, synchronization, and passthrough in intrafirm trade prices," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 295-308, April.
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Cited by:
  1. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.

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