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ON ENDOGENEITY OF RETAIL MARKET POWER IN AN EQUILIBRIUM ANALYSIS: A CONTROL FUNCTION APPROACH

Vardges Hovhannisyan, Kyle Stiegert (kwstiegert@wisc.edu) and Marin Bozic

No 149830, 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. from Agricultural and Applied Economics Association

Abstract: The endogeneity of retail market power arises in the retail pricing equation due to the correlation between margins and unobserved cost components. Nevertheless, it has long been ignored in the equilibrium analysis of retail behavior. We address the issue via a control function approach in a new conceptual framework with consumer preferences represented by a benefit function. We further offer three test procedures to evaluate the endogeneity of retail market power. The empirical value of the model is illustrated in an application to the US yogurt industry. Outcomes from endogeneity tests provide strong evidence for market power endogeneity. Moreover, ignoring the issue results in downward bias in retail market power.

Keywords: Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization; Marketing (search for similar items in EconPapers)
Pages: 34
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea13:149830

DOI: 10.22004/ag.econ.149830

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