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Retail Competition and the Dynamics of Consumer Demand for Tied Goods

Author

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  • Hartmann, Wesley R.

    (Stanford U)

  • Nair, Harikesh S.

Abstract

We empirically investigate the demand for tied goods sold through competing retail channels. Tied good pricing strategies commonly involve a low price on the initial purchase (i.e. the primary good) to drive adoption, and a substantial markup on aftermarket goods to capture value. However, if the goods are sold through downstream channels, retail market power and a misalignment of incentives could distort the relative prices of primary and aftermarket goods. To evaluate whether retail competition is strong enough to prevent such distortions, we explore the commonly noted example of razors and blades, which are sold through drug, grocery, mass merchandising, and club stores. We specify a forward-looking demand model that incorporates dynamics arising from the tied good nature of the products and the stockpiling and durability aspects of razors and blades. Furthermore, we allow intertemporal substitution in the purchase of both razors and blades to occur across channels as well as time. This modeling feature enables a novel approach to measuring retail competition in single category demand analyses. Our estimates indicate that there is substantial cross-channel substitution in razors, but some retail market power in blades. However, the channel with the most market power in blades, club stores, specializes in high volume customers that would adopt a razor even if blade prices are higher. This suggests that the manufacturer can achieve its desired level of razor adoption without vertical restraints, though blade sales may be slightly reduced by double marginalization.

Suggested Citation

  • Hartmann, Wesley R. & Nair, Harikesh S., 2007. "Retail Competition and the Dynamics of Consumer Demand for Tied Goods," Research Papers 1990, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1990
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Kusum Ailawadi & Eric Bradlow & Michaela Draganska & Vincent Nijs & Robert Rooderkerk & K. Sudhir & Kenneth Wilbur & Jie Zhang, 2010. "Empirical models of manufacturer-retailer interaction: A review and agenda for future research," Marketing Letters, Springer, vol. 21(3), pages 273-285, September.
    3. Phillip Leslie & Alan Sorensen, 2009. "The Welfare Effects of Ticket Resale," NBER Working Papers 15476, National Bureau of Economic Research, Inc.
    4. repec:eee:joreco:v:39:y:2017:i:c:p:11-22 is not listed on IDEAS
    5. Villas-Boas, Sofia B & Klapper, Daniel & Draganska, Michaela, 2010. "A Larger Slice or a Larger Pie? Investigating Margins in the Distribution Channel," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt064044x8, Department of Agricultural & Resource Economics, UC Berkeley.

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