A Study of Vertical Integration and Vertical Divestiture: The Case of Store Brand Milk Sourcing in Boston |
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Authors: | Michael A Cohen |
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Institution: | New York University Stern School of Business 40 West Fourth Street, Suite 914 New York, NY 06269‐4021 mcohen@stern.nyu.edu |
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Abstract: | This article investigates whether a retailer’s store brand supply source impacts vertical pricing and supply channel profitability. Using chain‐level retail scanner data, a random coefficients logit demand model is estimated employing a Bayesian estimation approach. Supply models are specified conditional on demand parameter estimates. Bayesian decision theory is applied to select the best fitting pricing model. Results indicate that a vertically integrated retailer engages in linear pricing for brand manufacturers’ products while competing retailers make nonlinear pricing contracts with brand manufacturers for branded products and store brands. A simulated vertical divestiture based on real world events provides evidence for improved channel efficiency. |
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