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Strategic Vertical Pricing in the U.S. Butter Market

  • Du, Ying
  • Stiegert, Kyle W.

This article develops a methodology for empirically analyzing vertically strategic interactions in a multi-level supply channel. The model is used to analyze the vertical channel for U.S. butter manufacturing and retailing. Aggregating products to the firm level and using a nonlinear AIDS demand system under alternative strategic pricing assumptions is estimated using full information maximum likelihood (FIML) for seven geographic markets from 1998-2002. The market demand for butter was found to very price elastic. Furthermore, cross price elasticities between private labels and the two large national brands were also very elastic. The selected market structure was one indicating category profit maximization of national brands (separate from private label) at the retail level, Vertical Nash competition in the vertical channel, and Bretrand competition at the manufacturing level. Our results strongly suggest that the retail market for food products is impacted by the underlying vertical structure. The study provides useful measures of imperfect competition in the retail manufacturing sector.

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File URL: http://purl.umn.edu/51712
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Paper provided by Agricultural and Applied Economics Association in its series 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin with number 51712.

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Date of creation: Jun 2009
Handle: RePEc:ags:aaea09:51712
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  1. Gasmi, F. & Laffont, J. J. & Vuong, Q. H., 1990. "A structural approach to empirical analysis of collusive behavior," European Economic Review, Elsevier, vol. 34(2-3), pages 513-523, May.
  2. Suzuki, Nobuhiro & Kaiser, Harry M., 1997. "Imperfect Competition Models and Commodity Promotion Evaluation: The Case of U.S. Generic Milk Advertising," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 29(02), pages 315-325, December.
  3. Jeffrey J. Reimer, 2006. "Vertical Integration in the Pork Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(1), pages 234-248.
  4. Chavas, Jean-Paul & Mehta, Aashish, 2002. "Price Dynamics in a Vertical Sector: The Case of Butter," Staff Paper Series 452, University of Wisconsin, Agricultural and Applied Economics.
  5. Cotterill, Ronald W. & Dhar, Tirtha Pratim, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Research Reports 25189, University of Connecticut, Food Marketing Policy Center.
  6. William P. Putsis Jr. & Ronald W. Cotterill & Ravi Dhar, 1999. "Assessing the Competitive Interaction between Private Labels and National Brands," Yale School of Management Working Papers ysm131, Yale School of Management.
  7. Cotterill, Ronald W. & Putsis, William P., Jr. & Dhar, Ravi, 2000. "Market Share and Price Setting Behavior For Private Labels and National Brands," Research Reports 25209, University of Connecticut, Food Marketing Policy Center.
  8. Kadiyali, Vrinda & Vilcassim, Naufel & Chintagunta, Pradeep, 1998. "Product line extensions and competitive market interactions: An empirical analysis," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 339-363, November.
  9. repec:cdl:compol:217 is not listed on IDEAS
  10. Dhar, Tirtha Pratim & Chavas, Jean-Paul & Gould, Brian W., 2002. "An Empirical Assessment of Endogeneity Issues In Demand Analysis for Differentiated Products," Research Reports 25227, University of Connecticut, Food Marketing Policy Center.
  11. Shinn-Shyr Wang & Kyle W. Stiegert & Tirtha P. Dhar, 2010. "Strategic Pricing Behavior under Asset Value Maximization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(2), pages 151-170, 06.
  12. K. Sudhir & Vrinda Kadiyali & Vithala R. Rao, 2001. "Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer," Yale School of Management Working Papers ysm229, Yale School of Management.
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  15. Cotterill, Ronald W. & Putsis, William P., Jr., 1998. "Testing the Theory: Vertical Strategic Interaction and Demand Functional Form," Research Reports 25211, University of Connecticut, Food Marketing Policy Center.
  16. Tirtha Dhar & Jean-Paul Chavas & Ronald W. Cotterill & Brian W. Gould, 2005. "An Econometric Analysis of Brand-Level Strategic Pricing Between Coca-Cola Company and PepsiCo," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 905-931, December.
  17. Brian W. Gould, 1998. "Factors Affecting the Timing of Purchasing of Butter, Margarine, and Blends: A Competing Goods Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 793-805.
  18. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  19. Brian W. Gould, 2003. "An Empirical Assessment of Endogeneity Issues in Demand Analysis for Differentiated Products," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 605-617.
  20. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-386, December.
  21. André Bonfrer & Pradeep K. Chintagunta, 2004. "Store Brands: Who Buys Them and What Happens to Retail Prices When They Are Introduced?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 24(2), pages 195-218, 03.
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