Abstract
Consumers are currently affected by an unprecedented rise in inflation, which has been particularly severe in food and retail markets. Exogenous shocks, such as COVID-19 and armed conflicts, are potential causes of increasing prices. Still, they may also be driven by specific regulations or the exercise of market power at different levels of the retail chain. Not all countries and product markets are affected equally, which raises questions regarding the source of this heterogeneity in market responses. This project aims to document this process, understand its causes, and support evidence-based economic policy. We focus on the role of Producer And RETail market Organization (PARETO) in shaping the economic environment. For this purpose, we will develop novel theories and exploit new, unique cross-country scanner and production datasets covering consumers, producers, and retailers in 17 European countries. The current project aims to push the research frontier of theoretical and empirical work in the
field of industrial organization of producer and retail markets.
We divide our project into four work packages (WP).
- WP1 starts by documenting facts about pricing heterogeneity across countries, producers, and retailers and attempts to identify the consumers who have been most severely affected by inflation. We will estimate how different cost shocks faced by firms, such as changes in energy costs and taxes, translate into producer and consumer prices. Then, we will examine the determinants of this pass-through of costs to prices. Getting a better understanding of the factors determining the degree of price transmission of cost shocks and their relative importance therein is crucial for evaluating a wide range of public policies. We will contribute to important public policy debates, such as how to fight inflation or how to design regulations to modify consumers’ diets.
- WP2 deals with producers’ and retailers’ market power, i.e. their ability to influence market prices and charge markups above their average costs. We will document whether the increase in markups that have been found in the US can also be observed in Europe, how and why it varies across markets and different levels of the vertical chain. This work package will then analyze how specific economic policies affect firms’ market power. Quantifying the evolution of market power and separating its different components is essential for understanding the resulting consequences for consumer welfare. Our evidence on markup differences across space and time will, therefore, be an important input for policymakers. Identifying relevant factors that drive markup changes, which is one aim of this work package, is crucial for industrial policy design.
- WP3 extends existing methods of estimating consumer demand by accounting for multiple purchases of the same good and complementarities across products. Modeling
interdependencies across products is essential in retail markets where consumers often purchase most in a single store. This work package analyzes how these relationships
affect pricing strategies, the division of profit between retailers and producers, and
regulatory policies. It addresses a technical challenge of dimensionality, that is, how to consider the substitution patterns for many products. Furthermore, it provides novel empirical frameworks and theoretical contributions to provide insights into the degree of demand interdependencies among food categories and their impact on optimal policy design. - WP4 analyzes how retailers’ entry and exit strategies across formats and product groups have adjusted in recent years. The inflation resilience of households crucially depends on the choice-set of available products and sellers and the ability of consumers to adjust their consumption patterns following a price increase. The entry and exit of products contribute substantially to changes in overall price levels. This package focuses on two market trends: the rise of online retailing and restructuring due to the entry of discounters. It seeks to determine how different pricing schemes between retailers and producers, buyer power, and changes in the market structure affect the product assortment available to consumers. As market concentration rises, policymakers will need a sound understanding of interactions between production and distribution chain components. From a technical standpoint, the correct specification of buyer-seller relationships is crucial. This work package addresses this challenge by proposing two extensions to the theoretical literature: a model of endogenous supplier-buyer networks and a model of platforms acting as both gatekeepers and sellers.