Competition and Vertical Relationships in Food Retail Markets - A French-German Comparative Analysis

• Applicant: Professor Dr. Gordon J. Klein
• Subject Area: Statistics and Econometrics
• Term: from 2016 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 315503248

1.5. Summary and Motivation The objective of this project is to better understand the vertical relationships between retailers and manufacturers in agro food chains and how consumer preferences and the strategic decisions of each other s affect the level of price, variety and characteristics of the products offered to consumers. Given that the findings may depend on the particular market structure in the different levels of the value chain, we aim in analyzing some food product categories in the German and the French markets. Those markets are particular suitable, because they are characterized by several structural differences in the retail sector (market share of discounters, private label penetration, competition intensity at the manufacturer and retailer side), but have other market characteristics in common (purchasing power, market size). We will focus on two specific questions in cross-country and cross-category analyses. First, we will assess how the structure of the retailing industry affects the relative bargaining power between manufacturers and retailers. We will then highlight the main factors of the bargaining power (WP1). Second, we will investigate the link between the strategic pricing decision of manufacturers and retailers and the strategic variety decision of retailers using the development of a new empirical model of the vertical interactions in the agro food chains integrating the variety decision at the retail level. We will then be able to assess how changes in vertical contracts or in consumers preferences affect the variety decision of retailers (WP2). Those analyses will use a structural econometric approach to model the market structure, the competition and the vertical relationships in German and French food chain markets. This structural econometric approach is composed of two main steps. The first one is the assessment of consumers substitution patterns for each product category and each market through the estimation of the demand models. The second one is the modeling of the supply side to evaluate the market power of each actor and the relative bargaining power of retailers with respect to manufacturers. We will show that market power and bargaining power will depend on the first step that is on the demand estimates. Given the consumers, manufacturers and retailers behavior, we will then be able to implement counterfactual analyses changing the level of concentration, the preferences of consumers, the nature of contracts and other market characteristics and assess their impact on prices, variety offered, profits, and consumers welfare. To implement this econometric analysis, we will use German and French consumer panel data respectively provided by GfK Panel Services and Kantar WorldPanel. Those data describe all purchases of some product categories.

• DFG Programme: Research Grants
• International Connection: France
• Cooperation Partners: Professorin Dr. Celine Bonnet; Dr. Zohra Bouamra-Mechemache