Retail Competition and the Dynamics of Consumer Demand for Tied Goods

38 Pages Posted: 25 Apr 2008 Last revised: 20 May 2009

Wesley R. Hartmann

Stanford University - Graduate School of Business

Harikesh Nair

Stanford University - Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2009

Abstract

We present a demand system for tied goods incorporating dynamics arising from the tied-nature of the products and the stockpiling induced by storability and durability. We accommodate competition across tied good systems and competing downstream retail formats by endogenizing the retail format at which consumers choose to stockpile inventory. This facilitates measurement of long-run retail substitution effects and yields estimates of complementarities within, and substitution across, competing systems of tied-goods. We present an empirical application to an archetypal tied-goods category, razors and blades. We discuss the implications of measured effects for manufacturer pricing when selling the tied products through an oligopolistic downstream retail channel and assess the extent to which retail substitution reduces channel conflict.

Keywords: tied goods, retail competition, dynamic discrete choice, durable good replacement, endogenous consumption, long-run effects, vertical channels, razor-blade market

JEL Classification: C25, C61, D91, L11, L12, L16, L68, M31

Suggested Citation

Hartmann, Wesley R. and Nair, Harikesh, Retail Competition and the Dynamics of Consumer Demand for Tied Goods (May 11, 2009). Stanford University Graduate School of Business Research Paper No. 1990. Available at SSRN: https://ssrn.com/abstract=1124593 or http://dx.doi.org/10.2139/ssrn.1124593

Wesley R. Hartmann

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Harikesh Nair (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-4256 (Phone)

HOME PAGE: http://faculty-gsb.stanford.edu/nair/index.html

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