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Market Structure and Cost Pass-Through in Retail

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  • Nicholas Li
  • Gee Hee Hong

Abstract

We examine the extent to which vertical and horizontal market structure can together explain incomplete pass-through. We develop a model that highlights the interactions between horizontal and vertical structure and their effects on pass-through from commodity to wholesale prices and wholesale to retail prices. Using scanner data from a large U.S. retailer, we estimate product level pass-through rates for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. We find that greater control of the value chain by the retailer results in higher commodity price pass-through into retail prices compared to national brands – 40% higher for private label manufactured goods and 10% higher for private label non-manufactured goods. We also find substantial effects of horizontal structure on pass-through – products and brands with higher market shares have higher retail markups and lower cost pass-through. Our results emphasize that accounting for both vertical and horizontal structure is important for understanding how market structure affects pass-through, as a reduction in double-marginalization can raise pass-through directly but can also reduce it indirectly by increasing market share.

Suggested Citation

  • Nicholas Li & Gee Hee Hong, 2013. "Market Structure and Cost Pass-Through in Retail," Working Papers tecipa-470, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-470
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gagnon, Etienne & Lopez-Salido, J. David, 2014. "Small Price Responses to Large Demand Shocks," Finance and Economics Discussion Series 2014-18, Board of Governors of the Federal Reserve System (U.S.).
    2. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2015. "The Price Impact of Joining a Currency Union: Evidence from Latvia," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(2), pages 281-297, September.
    3. Lloyd, T.A. & McCorriston, S. & Morgan, C.W. & Poen, E. & Zgovu, E., 2014. "Retail price dynamics and retailer heterogeneity: UK evidence," Economics Letters, Elsevier, vol. 124(3), pages 434-438.
    4. Nicholas Li, 2014. "Sticker Shock: The Causes of the Canada-US Price Differential," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 409, May.
    5. Asche, Frank & Larsen, Thomas A. & Smith, Martin D. & Sogn-Grundvåg, Geir & Young, James A., 2015. "Pricing of eco-labels with retailer heterogeneity," Food Policy, Elsevier, vol. 53(C), pages 82-93.
    6. Loy, Jens-Peter & Holm, Thore & Steinhagen, Carsten & Glauben, Thomas, 2014. "Cost Pass-Through In Differentiated Product Markets: A Disaggregated Study For Milk And Butter," 88th Annual Conference, April 9-11, 2014, AgroParisTech, Paris, France 169762, Agricultural Economics Society.
    7. Adachi, Takanori & Ebina, Takeshi, 2014. "Double marginalization and cost pass-through: Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss," Economics Letters, Elsevier, vol. 122(2), pages 170-175.

    More about this item

    Keywords

    pass-through; market structure; market power; pricing; retail; vertical integration; intra-firm; private labels;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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