• Corpus ID: 7888028

How Do Vertical Contracts Affect Product Availability? An Empirical Study of the Grocery Industry

@inproceedings{Hristakeva2016HowDV,
  title={How Do Vertical Contracts Affect Product Availability? An Empirical Study of the Grocery Industry},
  author={Sylvia Hristakeva},
  year={2016}
}

• Sylvia Hristakeva
• Published 2016
• Economics

Producers frequently provide financial incentives to retailers in order to gain distribution for their products. These payments often take the form of vendor allowances: lump-sum transfers to retailers that do not directly depend on volume. To quantify the size of vendor allowances and their effects on product assortments and welfare, I develop a framework to identify lump-sum transfers using only data on retail prices, sales, and assortments. Without making any assumptions about producer and retailer bargaining, set estimates of vendor allowances are recovered. Additionally, by assuming that producers make take-it-or-leave-it offers, point estimates can be obtained. Lower bounds from set estimates imply that, on average, vendor allowances amount to at least 4.7% of retailer revenues. I apply model estimates to simulate how market outcomes change in the absence of vendor allowances. Counterfactual simulations predict that retailers fare worse, product variety is reduced as retailers replace “niche” products with “mainstream” options, but consumers nevertheless are better off. Small producers, which offer high-velocity products, increase market distribution and profits, but, absent marginal cost data, consequences for large producers are uncertain. ∗I thank Julie Holland Mortimer and Michael Grubb for their guidance, advice, and continued support. I also thank Arthur Lewbel, Drew Beauchamp, Alon Eizenberg, Paul Grieco, Wills Hickman, Mark Rysman for valued comments and suggestions. I am also grateful for feedback from seminar participants at Boston College, Rochester University, Tilburg University, Yale SOM, UCLA Anderson. All estimates and analyses in this paper based on SymphonyIRI Group, Inc. data are by the author and not by SymphonyIRI Group, Inc. All remaining mistakes are my own. Correspondence: [e-mail]