Asymmetric Demand Effects and Cost Pass-Through

26 Pages Posted: 20 Mar 2011 Last revised: 26 Oct 2014

See all articles by Alexei Alexandrov

Alexei Alexandrov

Amazon.com; Independent

Özlem Bedre-Defolie

ESMT European School of Management and Technology; University of Bergen, Economics Department; CEPR IO

Date Written: September 18, 2011

Abstract

We build a model to analyze the cost (wholesale price) pass-through incentives of a retailer selling two products. The products, `leader' and `follower,' are such that the leader's price affects the follower's demand, but not vice versa. These products could be in different categories, such as a featured soft drink and chewing gum near the register, or they could be in the same category, such as a national brand and a generic alternative. In each case, we find that the retailer has stronger incentives to pass-through trade deals to consumers on the leader product, and weaker incentives to pass-through on the follower product. We outline the intuition of these results and show that the incentive to pass-through on the leader product increases with retail competition. We show that in the monopoly case with linear demand, the pass-through rates add up to one, with the leader's being larger, and that higher demand elasticity due to peak demand reduces the difference between the pass-through incentives associated with each type of product, resulting in more similar pass-through rates. In the duopoly case with linear demand, competition increases the pass-through rate of the leader, decreases the pass-through rate of the follower, and makes the sum of the pass-through rates larger than one.

Keywords: pass-through, retailer, channels, trade promotions, one-stop shopping, after-market

JEL Classification: L11, L81, M31, H25

Suggested Citation

Alexandrov, Alexei and Alexandrov, Alexei and Bedre-Defolie, Özlem, Asymmetric Demand Effects and Cost Pass-Through (September 18, 2011). Simon School Working Paper No. FR 11-12, Available at SSRN: https://ssrn.com/abstract=1788765 or http://dx.doi.org/10.2139/ssrn.1788765

Alexei Alexandrov (Contact Author)

Amazon.com ( email )

Seattle, WA 98144
United States

Independent

Özlem Bedre-Defolie

ESMT European School of Management and Technology ( email )

Schlossplatz 1
10117 Berlin
Germany
+49(0)30212311531 (Phone)

HOME PAGE: http://www.esmt.org

University of Bergen, Economics Department ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

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