A simple experiment is used to examine the effect of grocery store nutrition labels on the sales of microwave popcorn in the East Bay area of California. Using an incomplete demand system we estimate the impact of the nutrition labels on sales of healthy (products that merit a nutrition label) and unhealthy (products that do not merit a nutrition label) microwave popcorn. Contrary to expectations, we find that nutrition labels decrease sales of healthy popcorn and increase sales of unhealthy popcorn across all stores. We speculate that nutrition labels on popcorn may signal unwanted product characteristics such as undesirable taste. Our findings highlight unintended effects created by nutrition labels. In terms of public welfare, it is important to consider not just the content of private industry nutrition labels but the effect they have on consumer behavior.
The paper brings Friedman?s (1971) collusive game to data and investigates whether the merger between the ?fth and fourth largest brewer (G. Heileman and Stroh) of the US beer industry in the mid 1990?s had a signi?cant impact on the incentives to collude in the industry. It does so by ?rstly estimating a random coe¢ cient Logit demand system for the US beer market. In a second step the demand estimates are used to conduct a merger simulation (Davis, 2006) quantifying coordinated e¤ects of the merger. The results show that the change in the likelihood of collusion for the non merging parties was negligible, but signi?cantly increased for the merged party.
Using data from the National Longitudinal Study of Adolescent Health, we provide empirical evidence that an individual's weight gain is associated with an increase in the number of obese friends, but a decrease in that number is not associated with weight loss. Previous studies of peer effects in body weight have tended to assume that peer effects operate symmetrically. We extend that literature by highlighting an asymmetric association between exposure to obesity and body weight, which suggests a possibility of an endogenous growth of obesity on the basis of the asymmetric peer effect in body weight.
Despite considerable debate as to Wal-Mart’s impact on retail workers, to date there has been little structural analysis on the topic. This paper measures and tests for Wal-Mart’s monopsony power in local labor markets using a dominant-firm model and data on contiguous U.S. counties where the company operates. Empirical results show that Wal-Mart’s monopsony power over workers varies significantly across the country, being higher in rural counties, particularly in the south. For instance, Wal-Mart’s buying power index in labor markets in rural southern central states is estimated to be 6% or higher while the impact on northeastern states’ wages is negligible. The results suggest that this is not a nationwide problem.
We propose a structural approach to measuring brand and subbrand value using observational data. Brand value is defined as the difference in equilibrium profit between the brand in question and its counterfactual unbranded equivalent on search attributes. Our model allows us to make this computation rigorously, taking into account competitors' and retailers' reactions in the real and counterfactual situations. We illustrate our method using quarterly city-level data on ready-to-eat breakfast cereals, and compare our brand value estimates with those obtained from previously used reduced-form methods. A key advantage of our methodology is that it provides estimates of the value of brands to firms—manufacturers and retailers—taking into account the brand's value to consumers as well as its impact on firm decisions.
The impact of consumer demand for quality on the agricultural and food system is an increased emphasis on quality differentiation but not all in the direction of upgrading quality. The more elite market segments are thriving and reaching growing numbers of consumers but the basic price/quality markets remain strong. Most recent economic studies find that consumers are willing to pay for food safety and other quality attributes, and for information about them. The magnitude of the valuations varies by food product, attribute, country, and study design. This literature and a case study of genetically modified foods suggest that consumer demand has a strong effect on agricultural and food trade.
The issue of supermarket chain power in wholesale markets has been around at least since the 1930’s when A&P surfaced as a nationwide chain with centralized buying (Adelman, 1959). Curiously those that complained the loudest were not firms that sold to supermarkets. Small retailers, who were unable to wrest concessions from brand manufacturers or wholesalers of fresh fruits and vegetables, alleged that large chain buyer power was driving them out of business. Consequently the Robinson Patman Act (1936) was passed to monitor the exercise of buyer power and its impact on smaller retailers as well as sellers. Enforcement has always been a thorny exercise because cost justified large buyer discounts are not illegal.(This abstract was borrowed from another version of this item.)
This paper analyzes the degree of market power in the U.S. brewing industry as measured by the closeness between the observed pricing behavior of ?firms and the equilibrium prices predicted by various pricing models: Bertrand-Nash, leadership, and collusion. Price leadership focuses on the largest U.S. beer producer Anheuser-Busch and its heavily marketed brand Budweiser whereas collusion focuses on the three largest brewers. Results indicate that Bertrand-Nash predicts the pricing behavior of fi?rms more closely than other models. Concerns about non-competitive pricing of the forms studied here should hence be low in this industry. Despite its closeness to the observed pricing behavior, Bertrand- Nash under-predicts prices of more price-elastic brands and over-predicts prices of less price-elastic brands.
The marketing channels for many goods involve the production of a raw commodity that is processed and then distributed to retailers for sale to consumers. Either the processing industry or the retailing industry or both may exercise substantial market power ultimately against raw commodity suppliers or consumers, the disorganized (competitive) economic groups at the ends of the market channel. This paper develops a theory of price collars to regulate pricing in such a channel. Price collars link raw product, wholesale and retail prices but do not explicitly set such prices. For example, a wholesale price collar could limit the wholesale price to 140% of the raw commodity price, and a retail price collar could limit retail price to 130% of the wholesale price.
This paper presents a comparative analysis of three different economic studies that played major roles in the policy debate over the Compact. It draws an important distinction between before and after analysis and counterfactual impact analysis and highlights constraining assumptions in models. Over time, the Compact increased raw milk price 2–3 cents per gallon, but if the Compact had not been in place during the first three years of its operation, raw milk prices would have been approximately 10 cents lower. Over time, retail prices went up by much more than 2–3 cents because other costs increased and channel firms increased tacit collusion and net profits. Studies give different counterfactual estimates for retail prices without the Compact. They range from a drop of 5.7 cents per gallon to 20.7 cents per gallon and are very sensitive to modeling approach. Comparative analysis, as done in this article, should contribute to policy formulation rather than appearing ex post. [EconLit citations: L66 L11 L13]. © 2005 Wiley Periodicals, Inc. Agribusiness 21: 455–471, 2005.
A hybrid approach to estimate the asymmetric price transmission between the farm gate and the retail market is proposed. The model is estimated for the fluid milk market of the Northeast U.S., that of the metropolitan area of New York City as well as that of Upstate New York. Spatially disaggregated data allows the impact of regional dairy regulation on the farm-retail price spread to be assessed, as well as the behavior of the middlemen regarding price transmission on markets with different levels of retail concentration to be estimated. Results suggest that intermediaries transmit variations in milk farm price in an asymmetric way in the short-run; that governmental intervention might force middlemen to act competitively in terms of price transmission; and that a high degree of concentration at the retail level is not synonymous with inefficient price transmission.
This report analyzes the economic impact of price fixing in the wet corn milling industry on consumers in the State of Michigan. Two of the companies who produce citric acid have pleaded guilty to fixing its price. In this report we assume that price fixing also occurred among HFCS producers. Given the structure of the corn wet milling industry and the direct purchaser industries, the overcharge is essentially uniform across buyers and selling arrangements. We develop an actual economic model of price transmission based upon the three facts: 1) The overcharge as a percent of the processed product value at wholesale and at retail is small, 2) Fixed proportion technology, and 3) consumers have imperfect information about prices so a small price change has no effect on their purchase behavior. These facts establish that 100 percent or more of the common overcharge will be passed through to consumers. In a more general economic model, we analyze pass through when consumer demand is not perfectly inelastic. For different strategies (profit maximization, sales maximization subject to a target level of profit, and loss leader strategies) and for different market structures (competitive, monopoly, oligopoly), the rate of pass through is 100 percent or greater given certain documented characteristics of the industries in this case. Given the prior points consumer damages are the common overcharges for each commodity times the amount of the commodity sold during the damage period. This is a lower bound estimate of consumer damages because pass through may well be greater than 100%.
Food safety policy is currently based on a combination of voluntary measures undertaken by producers and regulatory measures imposed, for example, by the US Department of Agriculture and the Food and Drug Administration (e.g., mandatory HACCP systems). This article addresses the question of whether reliance on voluntary approaches is likely to lead to adequate consumer protection. Drawing on recent literature on the choice between voluntary and mandatory approach to environmental protection and standard models of product liability, the article develops an analytical framework to determine the conditions under which firms are likely to invest in food safety voluntarily. The results suggest that for goods for which consumers can readily detect safety characteristics, market forces can create incentives for voluntary provision of safety. However, for goods for which consumers cannot readily detect food risks, market forces are not likely to be sufficient to afford adequate protection. Even in such a context, however, direct government regulation is not always necessary. The threat of the imposition of mandatory controls (possibly coupled with financial inducements for undertaking voluntary approaches) may provide firms with sufficient incentives to invest in food safety in an effort to avoid those controls. However, if firms do not respond, regulators must be prepared to follow through on their threats and impose a regulatory system of protection. © 1999 John Wiley & Sons, Inc.
Formulating theoretical models inevitably requires various simplifications that assist in making analysis tractable and that facilitate deriving closed form solutions. While the strategic insights gained from theoretical models of market phenomena are often quite valuable, testing the theoretical assumptions made in these models can aid in assessing the broader applicability of the conclusions drawn. This is particularly true in the channels area, where the focus of research to date has largely been theoretical in nature. In an initial attempt to examine some of the assumptions made in previous theoretical research (e.g., Jeuland and Shugan 1983, McGuire and Staelin 1983, Choi 1991, Raju, Sethuraman and Dhar 1995), we focus on a limited set of issues. First, we empirically examine the vertical channel assumptions made in two well-cited models of retailer-manufacturer interaction: a) the Choi (1991) Manufacturer-Stackelberg (MS) model, and b) the Raju, Sethuraman and Dhar (1995) Stackelberg model addressing store brands. Specifically, empirical tests are developed for Manufacturer Stackelberg conduct and the use of proportional mark-up rules within the channel. Second, since each of these models assume relatively simple linear demand structures, we examine how well linear demands characterize actual market behavior by comparing them to a flexible non-linear form, the LA/AIDS model. The empirical analysis is conducted using data for six individual categories (milk, butter, bread, pasta, margarine and instant coffee) across 59 local markets in 1991 and 1992. The empirical results generally support the assumptions of proportional mark-up behavior by retailers and Manufacturer Stackelberg conduct (Choi 1991) within the channel. While this lends support to the assumptions made in a number of theoretical models addressing channel behavior, we reject linear demands in a favor of a more flexible non-linear form. When combined with the analytical work of Lee and Staelin (1997), this suggests that additional theoretical and empirical work is needed in order to fully understand the implications of using a linear demand specification.
This study uses factor analysis to identify five service factors that are modeled with price as endogenous variables in a simultaneous equations framework to test whether a more concentrated market structure is related to higher service levels, which, in turn, are related to higher prices (the Demsetz quality critique) or whether a more concentrated market structure is directly related to higher prices (market power hypothesis). For this study of supermarkets in 34 local markets in six southwestern states, market share and concentration are not significantly related to any service factors. However, concentration has a significant positive relationship with price in the full sample, and share also is significantly related to price in subsamples of large, leading firms. Thus, the Demsetz quality critique is rejected. Also coordinated rather than unilateral effects seem predominant. When examining store size, superstores enjoy economics up to 50,000 square feet, but most of the cost savings are offset by pricing power related to increased services levels. © 1999 John Wiley & Sons, Inc.
A quantity surcharge exists when the unit cost of a given brand is higher for a large package than for a small one. This paper examines some product and household characteristics that influence observed quantity surcharging practices. Results indicate that the propensity to buy a large package of a product is positively influenced by the extent of a household's usage of that product, procurement cost, and carrying capacity and is negatively influenced by the propensity to price search. A retailer's decision to levy a quantity surcharge is, in turn, influenced by demand for the product, the propensity to buy large packages, and to some extent the product's carrying cost.
