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Strategic Vertical Pricing in the U.S. Butter Market

Author

Listed:
  • Du, Ying
  • Stiegert, Kyle W.

Abstract

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.

Suggested Citation

  • Du, Ying & Stiegert, Kyle W., 2009. "Strategic Vertical Pricing in the U.S. Butter Market," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 51712, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea09:51712
    DOI: 10.22004/ag.econ.51712
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    References listed on IDEAS

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    Keywords

    Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization;
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