We use high-frequency scanner data to estimate product-specific price transmission elasticities across product types, between national brands and private labels and across retail chains in the UK. The results provide new insights into the determinants of price transmission including the role of vertical control in the retail chain, the elasticity of retail mark-ups and retailer market power. Using data on 106 orange juice products over 130 weeks for 7 UK retail chains, we highlight significant variation in price transmission by chain and that the characteristics of pricing behaviour and differences in vertical control across are important determinants of price transmission

Lan, H.

Lloyd, Tim

McCorriston, S.

Morgan, C.W.

Bournemouth University Research Online

Price transmission at the micro-level: what accounts for the heterogeneity?

Lloyd, T.

Price transmission at the micro-level What accounts for the heterogeneity?Hao Lan (Xi’an Jiaotong Liverpool University, China)Tim Lloyd, (Bournemouth University, UK)Steve McCorriston (University of Exeter, UK)Wyn Morgan (University of Sheffield, UK)ICAE Vancouver 31 July 2018Four Features of this Research• High frequency retail scanner data• Estimation of vertical price transmission at barcode specific level by retailer• Highlight heterogeneity even for a homogenous product• Methodological innovation – propose a simple way toincorporate imperfect competition into the estimation ofprice transmission.2Price Transmission at the Micro level                             Tim Lloyd                                           Bournemouth University, UK Background• Until recently, price transmission undertaken at aggregate level• Availability of retail scanner data presents opportunities tounpack aggregate analysis of the past• Recent literature using scanner data emphasisesheterogeneity:• among different categories of food (degree of processing)• Private labels vs national brands (vertical coordination)• Differences by retailer less common but potentially importantgiven the imperfectly competitive nature of retail food markets• Market power typically implicated in ‘imperfect’ pricetransmission3Price Transmission at the Micro level                             Tim Lloyd                                           Bournemouth University, UK Why would price dynamics potentially vary across retail chains?4Retail markets are highly concentratedWhy would price dynamics potentially vary across retail chains?5Variation in market shareWhy would price dynamics potentially vary across retail chains?6Variation in use of Private labels Why would price dynamics potentially vary across retail chains?7Differences in positioning and  sales strategy We focus on orange juice. Why?• Simple, relatively  unprocessed product• Clear link with upstream product (oranges)• Private labels and national brands• Sold in all retailersPrice Transmission at the Micro level    Tim Lloyd       Bournemouth University 8All this heterogeneity leads to  . . . 9TescoAll this heterogeneity leads to  . . . 10SainsburyTescoAll this heterogeneity leads to  . . . 11SainsburyMorrisonsTescoAll this heterogeneity leads to  . . . 12SainsburyMorrisonsWaitroseTescoAll this heterogeneity leads to  . . . 13SainsburyMorrisonsWaitroseCo-opTescoPotential Implications• Law of one price is a myth. Price dispersion is the norm at the micro level.• Price transmission may not be uniform, even for identical products• Suggests competition may play a role in determining price transmission• Standard methods of price transmission in vertical markets potentially mis-specified where market power suspected14Explaining Price Transmission• Amiti et al., (2017) provide theoretical underpinning • In principle, 𝑃𝑃𝑃𝑃 = 𝑓𝑓 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶; 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀• Mark-up over marginal costs reflects extent of imperfect competition?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 = 𝑚𝑚𝑚𝑚𝑖𝑖 + ℳ𝑟𝑟 (?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 ,𝑀𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟 ) (1)?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 profit maximising price for product 𝑖𝑖 in retailer 𝑀𝑀;𝑚𝑚𝑚𝑚𝑖𝑖 marginal costs; ℳ𝑟𝑟 mark-up of retailer 𝑀𝑀;𝑀𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟 price of product 𝑖𝑖 in rival retailers.15The estimating equation ?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 = 𝜑𝜑1 𝑚𝑚𝑚𝑚𝑖𝑖𝑟𝑟 + 𝜑𝜑2𝑀𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟 (2)• 𝜑𝜑1 measures the price transmission• 𝜑𝜑2 is the strategic complementarity effect,  • With imperfect competition, omitting rival prices from the price transmission equation mis-specifies the price transmission equation and overstates price transmission16Price Transmission at the Micro level    Tim Lloyd       Bournemouth University Data• Nielsen scantrack: prices by retail chain• 35 orange juice products• 7 retail chains• 106 retailer x product time series (NB=27; PL=79)• 130 weeks• 11,303 price observations• To identify the strategically complementarity effect, we derive the 𝒑𝒑−𝒊𝒊𝒊𝒊−𝒓𝒓 as a price index rival retailers for each product in each retailer• Marginal costs approximated by weekly sterling price of frozen orange juice on spot market (Bloomberg). 17Econometric Approach • Exploiting  non-stationary of costs and prices we employ a large (N,T)  panel cointegration analysis• Mean Group (Pesaran and Smith 1995)  and Pooled Mean Group (Pesaran et  al. (1999) estimators• Long run relationship?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 = 𝜑𝜑1 𝑚𝑚𝑚𝑚𝑖𝑖𝑟𝑟 + 𝜑𝜑2𝑀𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟 (2)embedded in error correction representation of dynamic ADL modelaugmented by controls for sale prices and seasonals. 18Price Transmission and Strategic ComplementaritiesFull SampleCosts( �𝜑𝜑1) 0.138***Rival prices( �𝜑𝜑2) 0.427***19?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 = �𝜑𝜑1 𝑚𝑚𝑚𝑚𝑖𝑖𝑟𝑟 + �𝜑𝜑2?̅?𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟Key Result• A significant complementarity effect Vertical CoordinationPrice Transmission and Strategic ComplementaritiesFull SampleCosts( �𝜑𝜑1) 0.393*** 0.138***Rival prices( �𝜑𝜑2) 0.427***20?̅?𝑀𝑖𝑖𝑖𝑖𝑟𝑟 = �𝜑𝜑1 𝑚𝑚𝑚𝑚𝑖𝑖𝑟𝑟 + �𝜑𝜑2?̅?𝑀−𝑖𝑖𝑖𝑖−𝑟𝑟Key Result• A significant complementarity effect • PT over-stated (a lot) in absence of rival prices• Price transmission contingent on response to prices in rivals Vertical CoordinationFurther insights: Retailer Models• Drilling down into the data we estimate separate models for each for brands and private labels• For all retailers, price transmission lower for private labels than national brands, suggesting that where they exploit their power most• Strategic complementarity significant among all retailers except Tesco (the market leader) underlying its dominant role in the UK market21Summary• Price transmission with scanner data reveals important differences in price transmission, hidden in aggregate analysis, even for identically barcoded products• Underscores important role for private labels in exercising  retailer power• We show how to incorporate market power as a determinant of price transmission in a reduced form (tractable) framework.• Underlies potential bias in  estimates of price transmission in imperfectly competitive retail markets22Sensitivity Analysis• Key findings robust to a number of alternative specifications: • Models with and without controls for sales• Alternative definitions of rival prices• Testing endogeneity of rival prices• Inclusion of other costs (energy prices)23Next steps• Attempt to explain the differences in magnitude and pattern exhibited by each retailer in terms of market power and strategic complementarity across the national brands and private label they sell• Roll out in to other categories of foodPrice Transmission at the Micro level    Tim Lloyd       Bournemouth University 24

Price transmission at the micro-level What accounts for the heterogeneity?

http://eprints.bournemouth.ac.uk/36530/2/ICAE%202018%20Lloyd%2031.07.2018.pdf

Price transmission at the micro-level: what accounts for the heterogeneity?

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