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An Analysis of Bundle Pricing in Horizontal and Vertical Markets: The Case of the U.S. Cottonseed Market

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  • Shi, Guanming
  • Stiegert, Kyle W.
  • Chavas, Jean-Paul

Abstract

In this paper, we investigate substitution/complementarity relationships among products sold with different bundled characteristics and under different vertical arrangements. Our conceptual model demonstrates the interactive price impacts emanating from product differentiation, market concentration and market size. The model is applied to the U.S. cottonseed market using transaction level data from 2002 to 2007. This market has been impacted structurally in numerous ways due to the advances and the rapid adoption of seeds with differing bundles of biotechnology traits and vertical penetration emanating from the biotechnology seed industry. Several interesting findings are reported. The econometric investigation finds evidence of sub-additive pricing in the bundling of patented biotech traits. Vertical organization is found to affect pricing and the exercise of market power. While higher market concentration is associated with higher prices, there is also evidence of cross-product complementarity effects that lead to lower prices. Simulation methods are developed to measure the net price effects. These simulations are applicable for use in pre-merger analysis of industries producing differentiated products and exhibiting similar market complexities.

Suggested Citation

  • Shi, Guanming & Stiegert, Kyle W. & Chavas, Jean-Paul, 2009. "An Analysis of Bundle Pricing in Horizontal and Vertical Markets: The Case of the U.S. Cottonseed Market," Staff Papers 92248, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    • Handle: RePEc:ags:wisagr:92248
    DOI: 10.22004/ag.econ.92248
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    2. Ma, Xingliang & Shi, Guanming, 2010. "GM vs. Non-GM: A Survival Analysis of Hybrid Seed Corn in the US," Staff Paper Series 553, University of Wisconsin, Agricultural and Applied Economics.
    3. Ma, Xingliang & Shi, Guanming, 2013. "GM vs. Non-GM: A Survival Analysis of U.S. Hybrid Seed Corn," Agricultural and Resource Economics Review, Cambridge University Press, vol. 42(3), pages 542-560, December.
    4. Spielman, David J. & Kolady, Deepthi E. & Cavalieri, Anthony & Rao, N. Chandrasekhara, 2014. "The seed and agricultural biotechnology industries in India: An analysis of industry structure, competition, and policy options," Food Policy, Elsevier, vol. 45(C), pages 88-100.

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    Keywords

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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