Abstract

http://ssrn.com/abstract=1707894
 
 

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Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through


Celine Bonnet


GREMAQ, INRA

Pierre Dubois


University of Toulouse 1 - Toulouse School of Economics (TSE)

Sofia Berto Villas-Boas


University of California, Berkeley - Agricultural & Resource Economics

September 2010

CEPR Discussion Paper No. DP8004

Abstract:     
How a cost shock is passed through into final consumer prices may relate to nominal price stickiness and rigidities, the existence of non adjustable cost components, strategic mark-up adjustments, or other contract terms along the supply distribution chain. This paper presents a simple framework to assess the potential role of non linear pricing contracts and vertical restraints such as resale price maintenance or wholesale price discrimination in the supply chain in explaining the degree of pass-through from upstream cost shocks in the ground coffee category to downstream retail prices. We do so in the German coffee market where both upstream and downstream firms make pricing decisions allowing for non linear pricing and vertical restraints. Using counterfactual simulations of an upstream coffee cost shock, we find that the existence of resale price maintenance between manufacturers and retailers increases pass through rate by more than 10 points relative to the case when this assumption is not allowed with non linear pricing or when double marginalization along the distribution chain is present. The intuition for our findings is that resale price maintenance restrictions make it less possible for retailers to perform strategic mark-up adjustments when faced with a cost shock. We also find that the less concentrated upstream sector, and also when faced with less elastic demands, the larger the role of vertical restraints in preventing retailers to perform strategic mark-up adjustments, and thus the higher the pass-through increases.

Number of Pages in PDF File: 43

Keywords: Non Linear Pricing, Pass-Through, Resale Price Maintenance, Wholesale Price Discrimination.

JEL Classification: C13, L13, L41

working papers series





Date posted: November 14, 2010  

Suggested Citation

Bonnet, Celine and Dubois, Pierre and Villas-Boas, Sofia Berto, Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through (September 2010). CEPR Discussion Paper No. DP8004. Available at SSRN: http://ssrn.com/abstract=1707894

Contact Information

Celine Bonnet (Contact Author)
GREMAQ, INRA ( email )
Place Anatole France
Toulouse Cedex, F-31042
France
Pierre Dubois
University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
Sofia Villas-Boas
University of California, Berkeley - Agricultural & Resource Economics ( email )
310 Giannini Hall # 3310
Berkeley, CA 94720
United States
510-643-6359 (Phone)
510-643-8911 (Fax)
Feedback to SSRN


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