Advanced Search
MyIDEAS: Login to save this paper or follow this series

Testing the Theory: Vertical Strategic Interaction and Demand Functional Form

Contents:

Author Info

  • Ronald W. Cotterill
  • William P. Putsis Jr.
Registered author(s):

    Abstract

    Formulating theoretical models inevitably requires various simplifications that assist in making analysis tractable and that facilitate deriving closed form solutions. While the strategic insights gained from theoretical models of market phenomena are often quite valuable, testing the theoretical assumptions made in these models can aid in assessing the broader applicability of the conclusions drawn. This is particularly true in the channels area, where the focus of research to date has largely been theoretical in nature. In an initial attempt to examine some of the assumptions made in previous theoretical research (e.g., Jeuland and Shugan 1983, McGuire and Staelin 1983, Choi 1991, Raju, Sethuraman and Dhar 1995), we focus on a limited set of issues. First, we empirically examine the vertical channel assumptions made in two well-cited models of retailer-manufacturer interaction: a) the Choi (1991) Manufacturer-Stackelberg (MS) model, and b) the Raju, Sethuraman and Dhar (1995) Stackelberg model addressing store brands. Specifically, empirical tests are developed for Manufacturer Stackelberg conduct and the use of proportional mark-up rules within the channel. Second, since each of these models assume relatively simple linear demand structures, we examine how well linear demands characterize actual market behavior by comparing them to a flexible non-linear form, the LA/AIDS model. The empirical analysis is conducted using data for six individual categories (milk, butter, bread, pasta, margarine and instant coffee) across 59 local markets in 1991 and 1992. The empirical results generally support the assumptions of proportional mark-up behavior by retailers and Manufacturer Stackelberg conduct (Choi 1991) within the channel. While this lends support to the assumptions made in a number of theoretical models addressing channel behavior, we reject linear demands in a favor of a more flexible non-linear form. When combined with the analytical work of Lee and Staelin (1997), this suggests that additional theoretical and empirical work is needed in order to fully understand the implications of using a linear demand specification.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://fmpc.uconn.edu/publications/rr/rr40.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 040.

    as in new window
    Length:
    Date of creation: 1998
    Date of revision:
    Handle: RePEc:zwi:fpcrep:040

    Contact details of provider:
    Postal: 1376 Storrs Road, U-21, Storrs, Connecticut 06269-4021
    Phone: 860-486-2836
    Fax: 860-486-1932
    Web page: http://www.zwickcenter.uconn.edu
    More information through EDIRC

    Related research

    Keywords: pricing; channels; private labels; competitive strategy; Demand and Price Analysis; Industrial Organization;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zwi:fpcrep:040. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.