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On Endogeneity Of Retail Market Power In An Equilibrium Analysis: A Control Function Approach

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  • Hovhannisyan, Vardges
  • Stiegert, Kyle W.
  • Bozic, Marin

Abstract

The endogeneity of retail market power arises in the retail pricing equation due to the correlation between margins and unobserved cost components. Nevertheless, it has long been ignored in the equilibrium analysis of retail behavior. We address the issue via a control function approach in a new conceptual framework with consumer preferences represented by a benefit function. We further offer three test procedures to evaluate the endogeneity of retail market power. The empirical value of the model is illustrated in an application to the US yogurt industry. Outcomes from endogeneity tests provide strong evidence for market power endogeneity. Moreover, ignoring the issue results in downward bias in retail market power.

Suggested Citation

  • Hovhannisyan, Vardges & Stiegert, Kyle W. & Bozic, Marin, 2013. "On Endogeneity Of Retail Market Power In An Equilibrium Analysis: A Control Function Approach," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149830, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea13:149830
    DOI: 10.22004/ag.econ.149830
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    Keywords

    Agribusiness; Agricultural and Food Policy; Consumer/Household Economics; Demand and Price Analysis; Industrial Organization; Marketing;
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