Vertical relations,pass-through,and market definition: Evidence from grocery retailing |
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| Institution: | 1. Düsseldorf Institute for Competition Economics (DICE), Heinrich-Heine University Düsseldorf, Germany;2. Westfälische Wilhelms-University Münster, Germany;3. CERNA Mines ParisTech, France;1. Koç University, Rumelifeneri Yolu Sarıyer, Istanbul 34450, Turkey;2. University of Cyprus, Cyprus;1. University of Gothenburg, CEPR, and Research Institute of Industrial Economics (IFN) Sweden;2. Research Institute of Industrial Economics (IFN), Box 55665, SE-102 15, Stockholm, Sweden;1. Department of Economics, Michigan State University, 486 West Circle Drive, East Lansing, MI 48824;2. Department of Economics, Nazarbayev University, 53 Kabanbay Batyr, Astana 010000, Kazakhstan;3. Department of Economics, Michigan State University, 486 West Circle Drive, East Lansing, MI 48824;1. WHU – Otto Beisheim School of Management, Chair of Organizational Theory, Burgplatz 2, Vallendar 56179, Germany;2. Ulm University of Applied Sciences, Faculty of Mathematics, Natural and Economic Sciences, Prittwitzstr. 10, Ulm 89075, Germany;3. WHU – Otto Beisheim School of Management, Burgplatz 2, Vallendar 56179, Germany;1. Department of Economics, California State University, East Bay, United States;2. Centro de Investigación Económica and Department of Economics, ITAM, Mexico |
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| Abstract: | We examine how different pass-through rates from input prices to retail prices and different vertical contracts affect upstream market definition. Simple theoretical considerations suggest that vertical restraints induce higher pass-through rates and thus lead to a larger upstream market definition when compared to linear wholesale pricing, given that contracts with linear pricing are associated with lower pass-through rates under imperfect competition. Data from grocery retailing is used to quantify the empirical implications of our theoretical assertion. We find that resale price maintenance leads to larger upstream market definitions than linear pricing. We therefore advise competition authorities to carefully model vertical market structures, whenever they expect incomplete pass-through to be important. |
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