Market Structure and Cost Pass-Through in Retail

Abstract

We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through. To answer this question, we use scanner data from a large U.S. retailer to estimate product level pass-through for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. Our findings emphasize that accounting for the interaction of vertical and horizontal structure is important in understanding how market structure affects pass-through, as a reduction in doublemarginalization can raise pass-through directly but can also reduce it indirectly by increasing market share.

Forty Years of Price Transmission Research in the Food Industry: Insights, Challenges and Prospects

“…This recent literature seeks to account for the heterogeneity in both speed and asymmetry of price transmission that is observed at the barcode level, attributing it econometrically to factors such as measures of market power, the degree of vertical integration, costs of consumer search and menu costs (e.g. Richards et al ., ; Hong and Li, ; Loy et al ., ). Interestingly, in their study of US breakfast cereals, Richards et al .…”

“…This recent literature seeks to account for the heterogeneity in both speed and asymmetry of price transmission that is observed at the barcode level, attributing it econometrically to factors such as measures of market power, the degree of vertical integration, costs of consumer search and menu costs (e.g. Richards et al, 2014;Hong and Li, 2015;Loy et al, 2015). Interestingly, in their study of US breakfast cereals, Richards et al (2014) find that, contrary to 'conventional wisdom', it is the costs of consumer search that impedes the process of price transmission rather than retail market power, and that measures that reduce these costs (such as Figure 2.…”

“…Food service ('eating out') is the largest (and fastest growing) component, representing almost three times more than agricultural value added. Clearly, what goes on between the farm and the fork is simply too big to ignore, as the recent literature on the impacts of the food industry on price transmission emphasises (Nakamura and Zerom, 2010;Hong and Li, 2015). Finally, as the mechanism governing the inflationary process, there is also an important macro-economic dimension to price transmission.…”

The role of retail market power and state regulations in the heterogeneity of farm‐retail price transmission of private label and branded products

“…On one hand, retailers in concentrated markets with higher market power might be less concerned with competitive responses to higher retail prices (Richards et al., ). Therefore, as retailers have greater flexibility in pricing private labels (Hong and Li, ), those having more market power may raise the retail price of private label milk more quickly and lower the retail price more slowly. On the other hand, name brands exhibit double marginalization from the wholesale and retail levels, yet the integrated vertical structure of private labels can reduce or eliminate one level of markups.…”

Competition Policy and Antitrust Law: Implications of Developments in Supply Chain Management

“…These developments have boosted the market power of retailers and increased their ability to influence competition in ways that affect price. As Hong and Li (, p. 152) explain, “… repeated waves of retail consolidation underscore the potential importance of retailers as price‐setting intermediaries.” These developments have occurred in both the U.S. and internationally (Fernie et al., ). As a result, the “…exercise of market power by dominant retailers is featuring high on the public policy agenda” (Gielens et al., , p. 136).…”