Dynamic Explanation of Industry Structure and Performance
Cotterill
pass through rate (CPTR) equations. They are presented
in Table 3. Note that they are only functions of the
demand parameters. This is due to the constant marginal
cost assumption. Slade (1995), Choi (1991), Cotterill et
al. (2000) and others have modeled vertical interaction
by assuming that retail sales are made by a monopolist
that is supplied by more than one manufacturer. Here we
assume the converse (multiple retailers each supplied by
a single manufacturer). If in fact our retailers are
monopolists then the transmission rates in Table 3 for
changes in processor’s marginal cost are identical for an
industry wide change such as the change in the price of a
farm commodity, and for a firm specific cost shift, such
as a change in labor costs or change due to merger
related efficiencies. In the full coordination or vertical
integration game we have one monopoly rather than two
successive monopolies. With linear demand and
constant marginal costs one identically obtains a CPTR
= 1/2. For Stackleberg one obtain 1/4 and for vertical
Nash one obtains 1/3. Thus the cost pass through rate, or
what some call the farm to retail price transmission rate,
is a function of the strategic game played, and it is less
than the CPTR for perfect competition, which is 1, in
this linear demand, constant cost model.
Relaxing the retail monopoly assumption in Table 3
produces cost pass through rates that are functions of the
retail demand parameters. Now firm specific and
industry wide cost shocks assume different values. The
degree of vertical competition still affects the cost pass
these rate. This model clearly is suggestive rather than
definitive. It demonstrates an important new avenue for
research on an old issue (Means 1935) that once again is
becoming important, the impact of concentrated food
manufacturing and retailing industries on vertical price
flexibility, which has a great impact on consumer and
farmer welfare.12
The lack of vertical price flexibility means that
consumers don’t get the signal to switch to other
products when supplies are short and they don’t get the
signal to use more of this product when supply is long.
Farmers suffer because their supply condition is ignored.
And given rapid technological progress and trade
liberalization over supply tends to be the norm. Hog
prices fell 39% from September 1997 to September
1998, but retail pork prices for the same period dropped
12 Means and subsequent researchers (Greer, 1992) focused on
the impact of shifts in demand and inflation on price flexibility
in a given industry. Here the focus is somewhat different. We
are analyzing supply side shocks and the flexibility of prices at
successive stages in a marketing channel to supply side
shocks. As such our analysts is a supply side version of the
Means administered price hypothesis.
only 1.5% (Tevis, p. 49). A similar problem exists for
navel oranges. To raise public knowledge of the
inflexible retail price problem Western Grocers
publishes weekly farm and retail navel oranges prices on
its website, http://www.wga.com. Writing on this issue
a Los Angeles Times reporter declares:
It's been a punishing year for most California orange
growers. But you'd never know it by checking out the
produce aisle. Although prices paid to farmers for this
season's big crop of navel oranges have plunged,
supermarket prices in many cases have jumped outpacing
even last year when a freeze wiped out two-thirds of the
crop. Quality problems and competition from imports
have helped drive down farm prices for navel oranges to
their lowest levels in years, as little as 6 cents a pound
according to the Department of Agriculture. Meanwhile,
the major Los Angeles-area supermarkets this week were
charging 89 cents to 99 cents a pound for the fruit. The
retail price for March is averaging $1.01, according to the
Western Growers Association, a produce trade group.
(Fulmer, 2000)
6. Shifting Power Balances Drive New Coordination
Programs: The U.S. Example
Successive monopoly creates other problems in
addition to stagnant or depressed price transmission. As
we show below, food retailers and manufacturers as well
as farmers and consumers suffer from the inefficiency of
successive monopoly. Yes, this is correct, everyone
loses when successive monopoly exists in a market
channel. But do we actually have successive
monopoly/oligopoly in the U.S. and Europe? Consider
the U.S.
In the 1980s leading food-manufacturing firms
enjoyed powerful market positions with strongly
differentiated brands supported by significant
advertising expenditures. Food manufacturing industries
such as carbonated beverages, breakfast cereal, and beer
are tight oligopolies that sell highly differentiated brands
that have reasonably inelastic (-1.5 to -3.0) brand level
demand curves at retail (Tellis, 1988; Cotterill, et al.
1996; Langan and Cotterill, 1994; Langan 1997; Ma
1997; Nevo, 1997; Cotterill and Haller 1997). The
observed brand inelasticity is primarily due to product
differentiation, however, some is also due to tacitly
coordinated pricing, i.e. price followship tends to reduce
brand elasticities (Cotterill, et al. 2000). Consumer pull
advertising and promotion by the brand manufacturer
reduces any bargaining power of buying groups
(Cotterill, 1997, Gerstner and Hess, 1991). Consumers
want the brand so retailers must carry it. Thus each
Food Marketing Policy Center Research Report No. 53
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