DP10623 Identifying Two Part Tariff Contracts with Buyer Power: Empirical Estimation on Food Retailing

Author(s): Céline Bonnet, Pierre Dubois
Publication Date: May 2015
Keyword(s): buyer power, differentiated products, retailers, two part tariff, vertical contracts
JEL(s): C12, C33, L13, L81
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10623

Using typical demand data on differentiated products markets, we show how to identify and estimate vertical contract terms modelling explicitly the buyer power of downstream firms facing two part tariff offered by the upstream firms. We consider manufacturers and retailers relationships with two part tariff with or without resale price maintenance and allow retailers to have a buyer power determined by the horizontal competition of manufacturers. Our contribution allows to recover price-cost margins at the upstream and downstream levels as well as fixed fees of two-part tariff contracts using the industry structure and estimates of demand parameters. Empirical evidence on the market for bottles of water in France shows that two part tariff contracts are used without resale price maintenance and that the buyer power of supermarket chains is endogenous to the structure of manufacturers competition. We are able to estimate total fixed fees and profits across manufacturers and retailers.