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Market Structure and Cost Pass-Through in Retail

  • Nicholas Li
  • Gee Hee Hong

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.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-470.

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Length: Unknown pages
Date of creation: 14 Jan 2013
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Handle: RePEc:tor:tecipa:tecipa-470
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  1. Olivier Coibion & Yuriy Gorodnichenko & Gee Hee Hong, 2013. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications," Working Papers 13-1, Bank of Canada.
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  14. Richard Pomfret & Patricia Sourdin, 2008. "Why Do Trade Costs Vary?," School of Economics Working Papers 2008-08, University of Adelaide, School of Economics.
  15. Saxonhouse, Gary R, 1976. "Estimated Parameters as Dependent Variables," American Economic Review, American Economic Association, vol. 66(1), pages 178-83, March.
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