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Vertical Relations, Pass-through, and Market Definition: Evidence from Grocery Retailing

Author

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  • Justus Haucap
  • Ulrich Heimeshoff
  • Gordon J. Klein
  • Dennis Rickert
  • Christian Wey

Abstract

We examine how different pass-through rates, from input- to final consumer prices, and different vertical contracts affect upstream market definition. Our theory model predicts that, under reasonable conditions, higher pass-through rates lead to definitions of larger upstream markets. Data from grocery retailing is used to quantify the empirical implications of our theoretical result. We find that resale price maintenance leads to larger upstream market definitions than linear pricing models. The reason is that linear pricing contracts are associated with lower pass-through rates under imperfect competition. We therefore advise competition authorities to carefully model vertical market structures, whenever they expect incomplete pass-through to be important.

Suggested Citation

  • Justus Haucap & Ulrich Heimeshoff & Gordon J. Klein & Dennis Rickert & Christian Wey, 2020. "Vertical Relations, Pass-through, and Market Definition: Evidence from Grocery Retailing," CESifo Working Paper Series 8700, CESifo.
  • Handle: RePEc:ces:ceswps:_8700
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    Cited by:

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    2. Alisa Frey & Justus Haucap, 2024. "VAT pass-through: the case of a large and permanent reduction in the market for menstrual hygiene products," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(1), pages 160-202, February.
    3. Sébastien Houde & Wenjun Wang, 2022. "The Incidence of the U.S.-China Solar Trade War," CER-ETH Economics working paper series 22/372, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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    More about this item

    Keywords

    market definition; vertical relations; pass-through; structural models;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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