Structural Analysis of Manufacturer Pricing in the Presence of a Strategic Retailer

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  • 1 January 2001
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      • Published in RePEc
Abstract
Consumer goods manufacturers usually sell their brands to consumers through common independent retailers. Theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer-retailer interaction (Vertical Strategic Interaction). Research in the Empirical Industrial Organization has focused on analyzing the competitive interactions between manufacturers (Horizontal Strategic Interaction). Decision Support Systems have made various assumptions about retailer pricing rules (e.g., constant markup, category profit maximization). The appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question. This paper therefore empirically infers: (1) The Vertical Strategic Interaction (VSI) between manufacturers and retailer (2) The Horizontal Strategic Interaction (HSI) between manufacturers simultaneously with the VSI; (3) The pricing rule used by a retailer The approach is particularly appealing because it can be used with widely available scanner data, where there is no information on wholesale prices. Researchers usually have no access to wholesale prices. Even manufacturers, who have access to their own wholesale prices, usually have limited information on competitors' wholesale prices. In the absence of wholesale prices, we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules. We then embed the formulae for wholesale prices into the estimation equations. While our empirical illustration is using scanner data without wholesale prices, the model itself can be applied when wholesale prices are available. Early research on the inference of HSI among manufacturers in setting wholesale prices using scanner data (for e.g., Kadiyali, Vilcassim and Chintagunta, 1996, 1999) made the simplifying assumption that retailers cha
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