22 de mayo, Carlos Noton, U. de Chile

Paper: Price Setting and Negotiation in the Supermarket Industry

Expositor: Carlos Noton, Universidad de Chile
Fecha: Miércoles 22 de mayo de 2019
Hora: 13:00 horas a 14:00 horas.
Lugar: Avda. Santa Clara N° 797,
Campus Ciudad Empresarial,
Sala C-302 – Edificio Cubo

Abstract

The retail industry displays heterogenous contractual arrangements regarding who sets retail prices. The agreements range from retailers freely setting prices to «retail-price-maintenance» (o RPM) in which manufacturers set consumer prices. Understanding who set retail prices is critic to assess the degree of competition and the welfare consequences of mergers in both upstream and downstream markets.

This paper examines the bottled water sector in Chile. We seek to empirically understand the price setting party and negotiation patterns between retailers and wholesalers in this sector. The study makes use of a unique data set of one of the largest supermarket chains in Chile. The data provide wholesale prices in this sector in addition to detailed consumer-level panel data that tracks consumer purchases over time.

We propose two different models of competition. In our first model, wholesalers and retailers bargain over wholesale prices and then retailers set retail prices. In our second model, wholesalers first simultaneously set retail prices and then bargain with retailers over wholesale prices.

We first estimate demand-side parameters from a random coefficients model. Using our deman side estimates, we estimate marginal costs and bargaining weights for both models of competition, with a GMM algorithm. The GMM algorithm recovers marginal costs for each product / week and then uses orthogonality conditions in these parameters to estimate bargainin weights.

We estimate the supply side parameters for both models and examine which model of competition fits the data better. We test for the models of competition with two methods. First, we examine the in-sample fit of the models to data. Second, we make use of a large upstream merger in the bottled water segment in Chile. In 2008, the third-largest bottled water firm in Chile, Benedictino, was purchased by the second-largest firm, The Coca-Cola Company. Our data extends over the years before and after the merger. We estimate the models with pre-merge data and examine which model fits the data better in the post-merger period.