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Neoclassical explanations of vertical organization and performance of food Industries

  • Ronald W. Cotterill

    (The University of Connecticut, Food Marketing Policy Center, Department of Agricultural and Resource Economics, Storrs, CT 06269-4021)

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    This paper examines the exercise of market power in vertical marketing channels in a more general and novel fashion than prior research. Neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz, and John Spengler are presented in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. The paper develops a structural model of price transmission in a channel that has differentiated product oligopolies at two stages. Increasing concentration at successive stages creates a problem of double marginalization. Vertical trading partners reduce it by avoiding vertical Nash (arms length) pricing via the use of trade promotions and other coordination methods such as private label. Finally, the rise in retail buyer concentration, six supermarket chains now control 52.6% of supermarket sales in the U.S., portends a possible shift to the European model wherein food retailers develop and promote their own brands. [EconLit Citations: L13,Q13]. © 2001 John Wiley & Sons, Inc.

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    Article provided by John Wiley & Sons, Ltd. in its journal Agribusiness.

    Volume (Year): 17 (2001)
    Issue (Month): 1 ()
    Pages: 33-57

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    Handle: RePEc:wly:agribz:v:17:y:2001:i:1:p:33-57
    Contact details of provider: Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1520-6297

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    1. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-76, Fall.
    2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    3. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Cotterill, Ronald W, 1986. "Market Power in the Retail Food Industry: Evidence from Vermont," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 379-86, August.
    5. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May.
    6. Ronald W. Cotterill & Andrew W. Franklin & Li Yu Ma, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Food Marketing Policy Center Research Reports 032, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    7. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
    8. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities For Demand And Competitive Strategy Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(2), October.
    9. Ronald W. Cotterill, 1999. "Jawboning cereal: The campaign to lower cereal prices," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 197-205.
    10. Cotterill, Ronald W. & Franklin, Andrew W. & Ma, Li Yu, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Research Reports 25229, University of Connecticut, Food Marketing Policy Center.
    11. Gerstner, Eitan & Hess, James D, 1991. "A Theory of Channel Price Promotions," American Economic Review, American Economic Association, vol. 81(4), pages 872-86, September.
    12. Cotterill, Ronald W., 1998. "Estimation of Cost Pass Through to Michigan Consumers in the ADM Price Fixing Case," Research Reports 25148, University of Connecticut, Food Marketing Policy Center.
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