Vertical Bargaining under Uncertain Retailer Responsiveness: A Structural Approach

Abstract

We develop an empirical framework to analyze vertical relationships with manufacturer-retailer bargaining. Our key innovation is the introduction of a novel Nash-in-Nash bargaining model that incorporates uncertainty in retailers' pricing responses to wholesale prices. This model extends existing Nash-in-Nash frameworks by relaxing assumptions about the timing of wholesale and retail price setting. We show that our model can be microfounded by a two-stage noncooperative game with delegated negotiations. We propose a two-step strategy that separably identifies bargaining and responsiveness parameters and implies a Generalized Method of Moments estimation procedure.

Keywords: Identification, GMM, Vertical relationship, Nash-in-Nash bargaining