On the Endogeneity of Retail Markups in an Equilibrium Analysis: A Control-Function Approach

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

Journal of Agricultural and Resource Economics, 2014, vol. 39, issue 2, 13

Abstract: The endogeneity of retail markups arises due to the correlation between the markups and unobserved costs in the retail pricing equation. This correlations may be a result unobserved product quality affecting both price and markups. Despite inconsistency resulting from markup endogeneity, it has long been ignored in the equilibrium analysis of retail behavior. We account for retail markup endogeneity using a control-function approach in which controls are derived from empirical evidence in the marketing literature. Furthermore, we adopt three test procedures to evaluate this endogeneity and apply our method in an econometric analysis of retail market behavior in the marketing of yogurt in the United States. The results provide strong statistical evidence for the fact that markup endogeneity has been overlooked, resulting in upward bias in retail markups.

Keywords: Production Economics; Public Economics (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:jlaare:186571

DOI: 10.22004/ag.econ.186571

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