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

Author

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

Abstract

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.

Suggested Citation

  • Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2009. "The Retail Service, The Market Power, and the Vertical Relationships in Breakfast Cereals Industry," 2009 Conference, August 16-22, 2009, Beijing, China 51770, International Association of Agricultural Economists.
  • Handle: RePEc:ags:iaae09:51770
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    References listed on IDEAS

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    1. 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.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    3. John M. Connor, 1999. "Breakfast cereals: The extreme food industry," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 247-259.
    4. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
    5. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
    6. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, pages 307-342.
    7. 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.
    8. 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.
    9. Asher Wolinsky, 1983. "Prices as Signals of Product Quality," Review of Economic Studies, Oxford University Press, vol. 50(4), pages 647-658.
    10. 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.
    11. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
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    14. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    More about this item

    Keywords

    vertical relationships; discrete choice; supermarkets; market channel; Industrial Organization; Marketing; L11; L13; L66;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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