A structural model of cost pass-through: the case of the US yogurt retailing

Vardges Hovhannisyan ()
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Vardges Hovhannisyan: University of Wyoming

Empirical Economics, 2018, vol. 55, issue 2, No 18, 805-830

Abstract: Abstract We provide a structural framework for retail cost pass-through based on a neoclassical inverse demand model and retail profit maximization conditions. Unlike previous literature where game-theoretic structures are imposed on cost pass-through, our framework allows for estimating cost pass-through and the degree of market competition simultaneously. Further, our model incorporates potential cross-brand effects representing demand substitution and strategic complementarity effects. Our model supplements the traditional reduced-form approach to pass-through and is applicable in environments, where the lack of brand-level cost data renders reduced-form analysis infeasible. The empirical value of our model is illustrated in an econometric analysis of retail pass-through for national and store brand yogurt. Our results indicate that: (1) market competition has a positive impact on own-brand cost pass-through, especially for national brands, and (2) overlooking cross-brand effects results in biased own-brand pass-through estimates. Finally, we provide a graphical illustration of the relationship between cost pass-through and market competition.

Keywords: Conjectural variations parameter; Own-/cross-brand pass-through; Retail competition; The benefit function-based demand (search for similar items in EconPapers)
JEL-codes: D11 D12 L10 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s00181-017-1283-9

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