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The Retail Service, The Market Power, and the Vertical Relationships in Breakfast Cereals Industry

  • Chidmi, Benaissa
  • Lopez, Rigoberto A.
  • Cotterill, Ronald W.

This article extends the Berry, Levinsohn, Pakes (1995) model to include retail services by Boston supermarkets in an equilibrium model of breakfast cereals and then tests alternative vertical pricing games between manufacturers and supermarkets to ascertain who’s got the pricing power. Empirical results show that retail services play a significant role in market equilibrium. Consumers are willing to pay for additional retail services embedded in their cereal purchases, especially those with higher income and no kids. Markups and market shares increase with the level of retail services, although manufacturers dominate pricing decisions in the market channel for breakfast cereals. Significant downward biases in price elasticities and markup estimates result when services are ignored.

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File URL: http://purl.umn.edu/51770
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Paper provided by International Association of Agricultural Economists in its series 2009 Conference, August 16-22, 2009, Beijing, China with number 51770.

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Date of creation: 2009
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Handle: RePEc:ags:iaae09:51770
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  1. John M. Connor, 1996. "Breakfast Cereals: The Extreme Food Industry," Issue Papers 12, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Douglas Rivers & Quang Vuong, 2002. "Model selection tests for nonlinear dynamic models," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 1-39, June.
  3. Samuel Gejdenson & Charles Schumer, 1999. "Consumers in a box: A consumer report on cereal," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 207-218.
  4. Benaissa Chidmi & Rigoberto A. Lopez & Ronald W. Cotterill, 2005. "Retail oligopoly power, dairy compact, and Boston milk prices," Agribusiness, John Wiley & Sons, Ltd., vol. 21(4), pages 477-491.
  5. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-42, March.
  6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  7. Ellickson, Paul B., 2006. "Quality competition in retailing: A structural analysis," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 521-540, May.
  8. Lopez, Rigoberto A. & Bhuyan, Sanjib, 1998. "Determinants of allocative efficiency losses from oligopoly power," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(1), pages 61-72.
  9. Villas-Boas, Sofia B., 2007. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
  10. Betancourt, Roger R. & Gautschi, David, 1993. "Two essential characteristics of retail markets and their economic consequences," Journal of Economic Behavior & Organization, Elsevier, vol. 21(3), pages 277-294, August.
  11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, August.
  12. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
  13. Wolinsky, Asher, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 647-58, October.
  14. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
  15. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
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