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G604 IO II Eric Rasmusen, erasmuse@indiana 11 April 2006

G604 IO II Eric Rasmusen, erasmuse@indiana.edu 11 April 2006 11 April, Tuesday. Exclusive Dealing     John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU. Do this with overheads, not a comptuter projector. Readings.

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G604 IO II Eric Rasmusen, erasmuse@indiana 11 April 2006

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  1. G604 IO II Eric Rasmusen, erasmuse@indiana.edu 11 April 2006 11 April, Tuesday. Exclusive Dealing     John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU. Do this with overheads, not a comptuter projector

  2. Readings • 11 April, Tuesday. Exclusive Dealing     John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU.

  3. Do Exclusive-Dealing Contracts Hurt the Excluded Firms? • Brewers sell beer to distributors, who resell to retailers (e.g., grocery store chains) • If brewer X requires a distributor to sell only X’s beer, does brewer Y end up with a higher-cost distributor?

  4. Suppose brewer X requires distributor G to sell only X’s beer, and brewer Y end up with a higher-cost distributor, H • Efficient: The exclusivity reduces G’s costs (Telser, Klein idea) • Inefficient: The exclusivity prevents brewer Y from using the lowest-cost distributor.

  5. The Test: in words • If brewer b1 is excluded from dsitributor d1, does he use an undesirable distributor, d4, while everything else stays the same?

  6. The test: No Foreclosure B1 went to d4, but there’s other shifting going on too 3: ME, d1 is now made exclusive,FORECLOSURE b1 B1 had to go to d4, the undesirable distributor

  7. The Chicago Beer Market • All Anheuser distributors just distribute Anheuser • Half of Miller distributors just distribute Miller • So Asker compares the Miller-exclusive and the non-Miller-exclusive markets

  8. Distributors

  9. Territories (a brewer must by law give exclusive territories)

  10. Identification Problems: How might Miller-exclusive markets be special? • 1. Strong dislike for beer there • 2. Miller exclusive distributors are the ones good at promotion • Foreclosure • Me: Is there any reason why Miller might only want low-cost distributors to be exclusives?

  11. THE DATA • Scanner data for grocery sales, n=138,213 • Household income and age by zip code, from the Census (Age not used, it seems) • Distributor areas from the Illinois govt. • Which deals are exclusive: vague sources (address wrong in the paper) http://www.gsb.uchicago.edu/kilts/research/db/dominicks/

  12. A BLP Model • Each consumer type buys one unit of beer per week (everybody buys the same quantity, or zero) • Instruments for Price: prices lagged and led by 4 weeks • That’s to avoid the effect of a week’s price being high because there is a lot of advertising (unobservable) that week

  13. Two-Step Procedure (p. 17) • What if cost unobservables are correlated with demand unobservables? Example: People like Green Beer on St. Patrick’s Day, but it is costly to color the beer green. • Then we’d think the mark-up was higher on St. Patrick’s day (more market power), but we’d be wrong. • So, instrument for price using our first-step cost estimate Using a two-step procedure we need to adjust the standard errors for the extra stage error

  14. Data • 138,213 observations on price and sales • 73 brands, 12 brewers, 71 stores, 42 distributions (Table 1) • Consumer prices from .19 to 2.97, mean .60 • Retailer prices from .15 to 1.11, mean .50. • Markups from -.34 to 2.49, mean 10 cents. • Market size– number of customers– is usually based on population. Here, it is number of shoppers for *any* product, or a forecast of that number. • Product characteristics: alcohol (4.4%), calories, serving size (keg vs. bottle). Light beer. Ice beer (see Table 5) • Whether there was a “promotion” or not

  15. BLP and Logit (elasticity about 3.4) logit Logit,IV BLP,IV BLP, IV Y-variable: Market share. Note the use of small font for standard errors. Model B isn’t rejected by C or D, using a chi-squared test for whether the het.coeffs are zero.

  16. Promotional Foreclosure (simple logit) Excluded brewers Get MORE sales! So there is no Foreclosure. What is happening? ID problem: Excluded: Excluded AB:

  17. Promotional Foreclosure (simple logit) All Exclusive Markets: a product sold by a distributor who only sells in markets where Both Miller and AB use exclusive contracts.

  18. Cost-based foreclosure (simple logit)

  19. A link to the course website http://www.rasmusen.org/g604/0.g604.htm

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