Channel Management and differentiation strategies: A case study from the market for fresh produce

The paper analyses the current differentiation strategies in the market for fresh produce. First a short review of the literature on channel structure and product differentiation is presented, in order to identify, on a theoretical grounding the incentives for differentiation strategies. Second, a case study is drawn of a UK channel intermediary organisation carrying out differentiation policies in the fresh produce category (on behalf of UK multiple retailer customers) supplied by a dedicated Italian grower. Results show that in the fresh produce industry there is room for product differentiation, but with contradictory welfare effects.fresh produce, product differentiation, channel structure and management, Agribusiness, Marketing,

BACKWARD IMPLICIT CONTRACTS, PRE-COMMITMENT AND MARKET POWER IN THE INTERNATIONAL DURUM WHEAT MARKET

We devise a formal test of market power that is applied to the international durum market. The model captures the asymmetric cost structure brought about the initial payment system of the Canadian Wheat Board. The model generates testable hypotheses about market conduct and optimal strategic positioning.Crop Production/Industries, Industrial Organization,

Vertical Price Leadership on Local Maize Markets in Benin

This paper considers vertical price relationships between wholesalers and retailers on five local maize markets in Benin. We show that if the common factor and the long-run disequilibrium error are not explicitly taken into account in testing the channel model, one can easily be wrong about how restrictions on the error-correction structure must be interpreted in terms of economic power in the channel. The empirical results show interesting differences between markets and reveal that retailers play a more prominent role in the price formation process than generally assumed in the literature. Retailers in the two major towns do not allow wholesalers to behave as vertical price leaders, but in the two larger rural centers, wholesalers involved in arbitrage among urban markets are able to influence price formation.Vertical price leadership, Marketing channels, Cointegration, Common Factor, Benin, Demand and Price Analysis, C32, D40, L10, O18, Q13,

Canadian Chicken Industry: Consumer Preferences, Industry Structure and Producer Benefits from Investment in Research and Advertising

The Canadian chicken industry has operated under supply management since the mid-1970s. Canadian consumer preferences for chicken have grown dramatically since then possibly in response to concerns about health and the levels of fat and cholesterol in red meats. However Canadian consumers are also looking for convenience with their food purchases. Canadians are buying their chicken in frozen further processed forms, fresh by cut without skin and bone and in a variety of other different ways reflecting their unique willingness to pay for various attributes. There is also an increasing trend for retailers and processors to brand the fresh chicken product sold through grocery stores (for example, Maple Leaf Prime). The preferences Canadian consumer have for various chicken products, the prices they are comfortable paying and the strategies followed by processors/retailers can directly affect the outcomes of industry wide strategies such as investment in generic advertising and research or the impact of international market changes such as border closures. This research is an initial attempt to quantify Canadian consumer preferences – for fresh product by type – for product by level of processing – for chicken product by cut - for fresh chicken by brand - to examine the impact of substitutability on a variety of market shocks. The various different disaggregations of Canadian chicken consumption are used in a number of simulation models to illustrate how important preferences are to producer returns when there are market shocks. If Canadians found all chicken products available in the grocery store to be perfectly substitutable then previous policy analysis assuming chicken is one homogeneous product would be sufficient for industry policy analysis purposes. If Canadians view all the different chicken products as imperfectly substitutable and given that various chicken products are produced in relatively fixed proportions (white and dark meat, for example) further understanding of how consumers make their purchase decisions could enhance the industries ability to predict outcomes. For example, border closing to Canadian exports ( as a result of an Avian influenza outbreak, for example) would result in a significant increase in the dark meat products available for sale through Canadian grocery stores. The results presented in this research could provide a clue as to how much dark meat prices might decline while white meat prices might remain unaffected. The results reported suggest that at the consumer level, chicken fresh and frozen products are not perceived to be perfect substitutes, within a narrow category such as fresh chicken breasts, they are not perceived as even close substitutes, within the fresh category branded products such as those developed by Lilydale and Maple Leaf are not perceived as perfect substitutes. As well, an initial look at the demand for individual chicken products by household suggests that there is far from a common buying pattern across Canadian households, even within a single province. The results also suggest that health and convenience attributes are driving Canadian consumer preferences. Simulation results highlight the fact that pricing strategies followed by major processors/retailers within Canada can influence the returns to generic advertising and research. Further research could provide additional robust estimates of the chicken product substitutability existing in the Canadian market and an increased understanding of the market characteristics currently operating. The results presented here suggest that further work in this area is important for the chicken industry to pursue.consumer behaviour, chicken consumption, differentiated products, Consumer/Household Economics, Demand and Price Analysis, Food Consumption/Nutrition/Food Safety, Marketing, D12, Q11, Q18,

Does the King Use Its Power? Price Competition in U.S. Brewing

Pricing behavior of firms in differentiated product markets has been studied intensely in recent empirical work. Despite several accounts in various industries, price leadership has remained mostly unassessed. This study analyzes price competition in the U.S. brewing industry with a focus on price leadership by the largest U.S. beer producer Anheuser-Busch and its heavily marketed "King of Beers" brand Budweiser. This paper employs a unique nationwide data set on brand-level sales collected before and after a 100% increase in the federal excise tax on beer. Brand-level demand estimates are combined with several supply models, including several price leadership scenarios, to simulate prices that would have prevailed under each model after the tax increase. These "predicted" prices are then compared to "actual" prices after the tax increase to determine the fit of the different supply models. While Bertrand-Nash behavior appears to be a more suitable model of price competition, it tends to under-predict price increases of more price-elastic brands and to over-predict price increases of less price-elastic brands. In particular, the predicted price of Budweiser is much larger than its actual value. An interpretation of this result is that Anheuser-Busch could exert more market power through its flagship brand than it actually does. Overall, actual price movements as a result of the tax increase tend to be more similar across brands than predicted by any of the models considered. While this pattern is not inconsistent with leadership behavior, leadership models considered in this paper do not conform with this pattern.Agribusiness, Demand and Price Analysis, Industrial Organization,

Feedback Stackelberg-Nash equilibria in mixed leadership games with an application to cooperative advertising

In this paper we characterize the feedback equilibrium of a general infinite-horizon Stackelberg-Nash differential game where the roles of the players are mixed. By mixed we mean that one player is a leader on some decisions and a follower on other decisions. We prove a verification theorem that reduces the task of finding equilibrium strategies in functional spaces to two simple steps: First solving two static Nash games at the Hamiltonian level in a nested version and then solving the associated system of Hamilton-Jacobi-Bellman equations. As an application, we study a novel manufacturer-retailer cooperative advertising game where, in addition to the traditional setup into which the manufacturer subsidizes the retailer's advertising effort, we also allow the reverse support from the retailer to the manufacturer. We find an equilibrium that can be expressed by a solution of a set of quartic algebraic equations. We then conduct an extensive numerical study to assess the impact of model parameters on the equilibrium

Strategic interdependence in the East-West gas trade : a hierarchical Stackelberg game approach

The current and potential benefits of the East-West gas trade are enormous for all participants. Realizing those benefits requires significant upfront investments. But the new, more complex structure of the gas transit system that has emerged following changes in Eastern Europe and the former Soviet Union has created uncertainties that bear on the expected benefits from investment. The authors argue for the existence of stable contracts that would create an environment more conducive to investments and allow all participants to benefit from expansion of the gas trade. As a guide to formulating incentive-compatible, transparent, flexible contracts, they propose a framework based on a Stackelberg game, with three players (a supplier, a transiter, and an importer) under Russia's leadership. They use this framework to analyze the contract modifications that would ensue from changes affecting the gas trade. They concluded that: (a) increased competitiveness of the transiter and supplier through cost reductions would improve the payoffs to all players (the transiter's and supplier's profits and the Western importer's welfare). Strategic behavior on the part of the supplier and transiter would ultimately reduce the price to the importer, enlarging gas demand and reducing costs. If increased competitiveness is the outcome of more costly gas from sources other than Russia, both the supplier's and the transiter's payoffs would improve but the importer's welfare would deteriorate. The supplier and transiter would have leeway to strategically raise their price and transit fee, respectively, while gaining market share. But the importer would face rising costs for gas imports and would lose welfare; (b) an increase in the scope for the importer to substitute between alternative sources of gas improves welfare for all three players. The perception by the supplier and transiter of increased threat of competition leads to a preemptive move not to lose market share. The transiter and supplier reduce the transit fee and supply price, respectively, allowing the importer to face a lower gas price. Import demand expands and welfare improves. The expanded trade more than compensates for the reduction in the transit fee an supply price and allows larger payoffs for transiter and suppliers; and (c) the perception of increased reliability of Russian gas supplies expands demand for Russian gas and leads to the expansion of trade. The supplier and transiter can raise their respective charges with expanded volume, improving their payoffs. The importer's welfare deteriorates as the cost of importing gas rises. The predictability of the players'reactions to changes in the environment would build confidence in the reliability of gas trade and allow its expansion benefiting all participants.Water and Industry,Economic Theory&Research,Environmental Economics&Policies,Energy Trade,Markets and Market Access