Empirical Studies of Retail Markets

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Ohio
Hosted By: Industrial Organization Society
  • Chair: Julie Holland Mortimer, Boston College

Spatial Competition and Preemptive Entry in the Discount Retail Industry

Fanyin Zheng
,
Columbia University

Abstract

Big box retail stores have a large impact on local economies and receive large subsidies from local governments. Hence, it is important to understand how discount retail chains choose store locations. In this paper, I study the store location decisions of those firms, examine the role of preemptive incentives, and evaluate the impact of government subsidies on those decisions. I model firms' store location decisions using a dynamic entry game. It extends the empirical models of dynamic oligopoly entry by allowing for spatially interdependent entry and introducing machine learning tools to infer market divisions from data. The results suggest that preemptive incentives are important in chain stores' location decisions and that they lead to loss of production efficiency. On average, the loss of producer surplus due to preemption is about one million dollars per store.

How Do Vertical Contracts Affect Product Availability? An Empirical Study of the Grocery Industry

Sylvia Hristakeva
,
University of California-Los Angeles

Abstract

Producers frequently provide financial incentives to retailers in order to gain distribution for their products. These payments often take the form of vendor allowances: lump-sum transfers to retailers that do not directly depend on volume. To quantify the size of vendor allowances and their effects on product assortments and welfare, I develop a framework to identify lump-sum transfers using only data on retail prices, sales, and assortments. Without making any assumptions about producer and retailer bargaining, set estimates of vendor allowances are recovered. Additionally, by assuming that producers make take-it-or-leave-it offers, point estimates can be obtained. Lower bounds from set estimates imply that, on average, vendor allowances amount to at least 5% of retailer revenues. I apply model estimates to simulate how market outcomes change in the absence of vendor allowances. Counterfactual simulations predict that retailers fare worse, product variety is reduced as retailers replace “niche” products with “mainstream” options, but consumers nevertheless are better off. Small producers, which offer high-velocity products, increase market distribution and profits, but, absent marginal cost data, consequences for large producers are uncertain.

Discrete Prices and the Incidence and Efficiency of Excise Taxes

Christopher Thomas Conlon
,
New York University
Nirupama Rao
,
New York University

Abstract

This paper uses detailed UPC-level data from Nielsen to examine the relationship between excise taxes, retail prices, and consumer welfare in the market for distilled spirits. Empirically, we document the presence of a nominal rigidity in retail prices that arises because firms largely choose prices that end in ninety-nine cents and change prices in whole-dollar increments. Theoretically, we show that this rigidity can rationalize both highly incomplete and excessive pass-through estimates without restrictions on the underlying demand curve. A correctly specified model, such as an (ordered) logit, takes this discreteness into account when predicting the effects of alternative tax changes. We show that explicitly accounting for discrete pricing has a substantial impact both on estimates of tax incidence and the excess burden cost of tax revenue. Quantitatively, we document substantial non-monotonicities in both of these quantities, expanding the potential scope of what policymakers should consider when raising excise taxes.

Better Together? Performance Dynamics in Retail Chain Expansion before and after Mergers

Mitsukuni Nishida
,
Johns Hopkins University
Nathan Yang
,
McGill University

Abstract

This paper evaluates how mergers affect the performance efficiency of retail chains. We estimate a dynamic model of retail expansion using data on convenience-store chains in Japan before and after an actual merger event. Our estimation allows for the presence of performance efficiency, in the form of serially correlated state variables that evolve both endogenously and stochastically. The estimates reveal that although the merged firm benefited from lower expansion costs, underlying performance efficiency for the merged entity did not improve following the merger, and such changes in performance varied across markets. Simulation analysis reveals the dampened performance is associated with the merged firm's diminished ability to retain efficiency gains from one year to the next. However, these negative effects can be mitigated if the merged firm inherits the primitives behind the performance efficiency of the more dominant merging party.
Discussant(s)
Jason Blevins
,
Ohio State University
Kevin R. Williams
,
Yale University
Yufeng Huang
,
University of Rochester
Brett Hollenbeck
,
University of California-Los Angeles
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • L2 - Firm Objectives, Organization, and Behavior