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Retail Environment and Manufacturer Competitive Intensity

Author

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  • Draganska, Michaela

    (Stanford U)

  • Klapper, Daniel

    (Johann Wolfgang Goethe-Universitat)

Abstract

We study how the intensity of competition and the degree to which manufacturers enjoy market power depends on the retail environment in a given market. Past research has discussed the growing importance of retailers and the power they enjoy over manufacturers. Yet, the empirical literature to date has not determined which retail characteristics have the largest impact on competitive behavior. Our starting point is the estimation of a structural demand-and-supply model, where both consumers' decisions and the strategic interactions between manufacturers and retailers are explicitly modeled. We identify the type of competitive behavior of manufacturers by measuring the deviation from a Bertrand-Nash equilibrium. This measure of competitive conduct is expressed as a function of key retail characteristics such as size of the retailer, its assortment depth, and category expertise. We illustrate the proposed approach using data for the ground coffee category in Germany. Our findings indicate that retail characteristics have indeed a significant effect on competitive intensity among upstream firms and on their ability to exercise market power. Hence, a manufacturer considering entry into a new market should not only take into account its competitors but also the specifics of the retail environment in this market.

Suggested Citation

  • Draganska, Michaela & Klapper, Daniel, 2006. "Retail Environment and Manufacturer Competitive Intensity," Research Papers 1953, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1953
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Celine Bonnet & Pierre Dubois & Sofia B. Villas Boas & Daniel Klapper, 2013. "Empirical Evidence on the Role of Nonlinear Wholesale Pricing and Vertical Restraints on Cost Pass-Through," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 500-515, May.
    2. Draganska, Michaela & Klapper, Daniel & Villas-Boas, Sofia B., 2007. "Determinants of Margins in the Distribution Channel: An Empirical Investigation," Research Papers 1959, Stanford University, Graduate School of Business.
    3. Richards, Timothy J. & Hamilton, Stephen F., 2011. "Variety and Cost Pass-Through among Supermarket Retailers," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114815, European Association of Agricultural Economists.
    4. Villas-Boas, Sofia B, 2007. "Using Retail Scanner Data for Upstream Merger Analysis: Counterfactual Experiments in the Retail Coffee Market," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5cn9d0rk, Department of Agricultural & Resource Economics, UC Berkeley.
    5. Michaela Draganska & Daniel Klapper & Sofia B. Villas-Boas, 2010. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Marketing Science, INFORMS, vol. 29(1), pages 57-74, 01-02.
    6. Sofia Berto Villas-Boas, 2007. "Using Retail Data For Upstream Merger Analysis," Journal of Competition Law and Economics, Oxford University Press, vol. 3(4), pages 689-715.
    7. Richards, Timothy J. & Allender, William J. & Hamilton, Stephen F., 2012. "Commodity price inflation, retail pass-through and market power," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 50-57.
    8. Sofia Berto Villas-Boas, 2009. "An empirical investigation of the welfare effects of banning wholesale price discrimination," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 20-46.
    9. repec:spr:manint:v:52:y:2012:i:5:d:10.1007_s11575-011-0118-8 is not listed on IDEAS
    10. Richards, Timothy J. & Acharya, Ram N. & Molina, Ignacio, 2009. "Retail and Wholesale Market Power in Organic Foods," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49329, Agricultural and Applied Economics Association.
    11. William Allender & Timothy Richards, 2010. "Market Diversion and Market Power: California Eggs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(1), pages 37-58, February.

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