G604 IO II
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G604 IO II Eric Rasmusen, [email protected] 11 April 2006 PowerPoint PPT Presentation


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G604 IO II Eric Rasmusen, [email protected] 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, [email protected] 11 April 2006

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G604 IO II

Eric Rasmusen, [email protected]

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

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


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?


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.


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?


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


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


Distributors


Territories (a brewer must by law give exclusive territories)


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?


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/


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


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


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


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.


Promotional Foreclosure (simple logit)

Excluded brewers

Get MORE sales!

So there is no

Foreclosure.

What is happening?

ID problem:

Excluded:

Excluded AB:


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.


Cost-based foreclosure (simple logit)


A link to the course website

http://www.rasmusen.org/g604/0.g604.htm


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