Non Linear Contracting and Endogenous Buyer Power between Manufacturers and Retailers: Empirical Evidence on Food Retailing in France



1 Introduction

Many industries present horizontal and vertical oligopoly structures where upstream sellers deal
with downstream buyers. This is particularly the case on markets where manufacturers sell their
products through retailing chains, for example for most processed food items in supermarkets.
These vertical relationships matter considerably for the final price setting by retailers, for competi-
tion analysis and market power estimation. The nature of contracts and the sharing of bargaining
power in the vertical chain are then important determinants of equilibrium outcomes.

This paper proposes to model and estimate structurally such a competition game where non
linear contracts are two part tariffs contracts. It presents the first empirical estimation of a structu-
ral model taking into account explicitly the endogenous buyer power of downstream players facing
contracts offered by the upstream level. We consider vertical contracts between manufacturers and
retailers where resale price maintenance may be used with two part tariffs and we allow retailers to
have some endogenous buyer power coming from the horizontal competition of manufacturers. Our
contribution allows to recover price-cost margins at the upstream and downstream levels in these
different structural models from the industry structure and from estimates of demand parameters.

Recent works in empirical industrial organization have started taking into account the strategic
behavior of retailers in the vertical chain as intermediaries between upstream producers and consu-
mers. As information on wholesale prices, on marginal costs of production or distribution, and on
vertical restraints are generally difficult to observe, methods often rely on demand side data and
require structural modelling of the supply side. Usual empirical industrial organization methods
propose to address the estimation of price-cost margins with the estimation of structural models
of competition on differentiated products markets such as cars, computers, breakfast cereals, beer
(Berry, 1994, Berry, Levinsohn and Pakes, 1995, Nevo, 1998, 2000, 2001, Pinkse and Slade, 2004,
Slade, 2004, Ivaldi and Martimort, 2004, Ivaldi and Verboven, 2005, Dubois and Jodar-Rosell, 2010)
and recent research studies identification with relaxed assumption on strategic behavior (Rosen,
2007, Pakes, Porter, Ho and Ishii, 2006). Until recently, most papers in this literature assumed



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