Two-part Fee Research In The Differentiated Product Market

In vertical competition markets,the contracts between upstream manufacturers and downstream retailers might conclude not only wholesale prices,but also fixed transfers.This kind of contract is called two-part tariff.Two-part tariff is relatively common,especially in retail industry.However,because of the difficult in estimating the fixed transfers in two-part tariff contract,empirical researches are extremely limited.Existing literatures have to ignore the fixed transfers,which lead to the biased result of welfare analysis of vertical integration and resale price maintenance.The major contribution of this paper is a computable algorithm to estimate the fixed transfers in two-part tariff contract,thus making empirical research in two-part tariff possible.To estimate the fixed transfers in two-part tariff contract,this paper makes two main adjustments based on the traditional empirical industrial organization model in vertical competition.Firstly,different from other literatures,this paper transforms the vertical bargaining between manufacturers and retailers into the assortment decisions by retailers.Retailers decide assortment choices in every period.If a particular brand is included in retailer' assortment choice,then this retailer has came to a agreement with the manufacturer of this brand.This paper develops a framework that integrates assortment choice and price competition in a differentiated product market.This is three-stage model:in the first stage,retailers decide optimal assortment choices;in the second stage,retailers make prices;in the third stage,consumers buy products.The sequence of modeling is opposite to the sequence of decisions.Secondly,this paper assumes that retailers are absolutely rational in assortment decisions.According to weak revealed preference,the profit from observed assortment choice is no less than profits from any other feasible assortment choices.By constructing unequal relationships between observed assortment choices and alternative assortment choices,this paper transforms those unequal relationships into the upper bounds and lower bounds of fixed transfers in retailers' profit function,and then estimates unknown parameters by minimum distance estimation.This approach is called moment inequality estimation,which is one of the research hotpots of econometrics and statistics during the past decade.This paper applies this model and method to analyze the potato chips industry in the US.Potato chips are common retailing product with various brands,high market concentration rate,competition and differentiation of products,which means the possibility of the existing of fixed transfers.The data in this paper comes from IRI Ltd.The variables used include product brands,manufacturers,UPC,prices,selling and so on.Prices and selling are retailer-week level.The number of observations in this paper is over 1.4 million,including 500 retailers,52 weeks,and 561 products.There are two main conclusions in this paper.First,fixed transfers of different brands are significantly different.Second,estimates for profit distributions between manufacturers and retailers will be significantly different from the situations in which fixed transfers are dismissed.Since profit distributions are used as an instrument to measure the bargaining power of retailers and manufacturers,the conclusions will be biased when researchers dismiss fixed transfers.Besides,this finding has important implications in analyzing the welfare effect of vertical integration and resale price maintenance.