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

brands is largely due to the only spring water national brand for which the total margin is much
larger than others⁸. Otherwise, national brands mineral water have an average total margin of
39.05% with 16.39% for the retail margin and 22.66% for the wholesale margin.

Comparing models 6 and 7, it seems that the fact that the retail buyer power of retailers is
endogenous, meaning that retailers can use the competing offers of manufacturers in the contracting
decision with a given manufacturer, raises the total margin compared to the case where the retailer
buyer power is exogenous. Indeed, wholesale margins are larger with endogenous buyer power
because manufacturers have to leave some additional "endogenous" rent to retailers through the use
of fixed fees that we can interpret as backward margins for retailers. Manufacturers’ reaction seems
thus to back up into higher wholesale prices the buyer’s capacity to recover backward margins.
By difference between models 6 and 7, we can see that on average these additional backward
margins represent 3.44% of retail price for mineral water and 18.32% for spring water. Industry
structure is thus very important for determining margins. Taking into account the endogeneity
of retailers’ buyer power in the vertical relationships and price-setting games is crucial for the
consistent evaluation of markups. The horizontal competition between manufacturers of bottles
of water allows retailers to obtain additional "endogenous" backward margins which raise the
wholesale prices offered by manufacturers.

6 Conclusion

In this paper, we presented the first empirical estimation of a structural model taking into ac-
count explicitly the endogenous buyer power of downstream retailers in two part tariffs contracts
between manufacturers and retailers. We show how to estimate different structural models embed-
ding the strategic relationships of upstream and downstream players, using demand estimates and
the industry structure. We consider several alternative models of competition between manufac-
turers and retailers on a differentiated product market and test between these alternatives. We
⁸There is a unique spring water national brand on the market for which total margins are relatively large. This
spring water comes from many springs located in different places in the country and is known to have thus low
transportation costs, and to use low quality low price packaging.

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