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G604 IO IIG604 IO II Eric Rasmusen, erasmuse@indiana.eduEric Rasmusen, erasmuse@indiana.edu

11 April 200611 April 2006

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

Do this with overheads, not a comptuter projectorDo this with overheads, not a comptuter projector

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ReadingsReadings 11 April, Tuesday. 11 April, Tuesday. Exclusive Dealing Exclusive Dealing

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

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Do Exclusive-Dealing Contracts Do Exclusive-Dealing Contracts Hurt the Excluded Firms?Hurt the Excluded Firms?

Brewers sell beer to distributors, who Brewers sell beer to distributors, who resell to retailers (e.g., grocery store resell to retailers (e.g., grocery store chains)chains)

If brewer X requires a distributor to If brewer X requires a distributor to sell only X’s beer, does brewer Y sell only X’s beer, does brewer Y end up with a higher-cost distributor? end up with a higher-cost distributor?

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Suppose brewer X requires Suppose brewer X requires distributor G to sell only X’s distributor G to sell only X’s

beer, and brewer Y end up beer, and brewer Y end up with a higher-cost distributor, with a higher-cost distributor,

H H

Efficient: The exclusivity reduces G’s Efficient: The exclusivity reduces G’s costs (Telser, Klein idea)costs (Telser, Klein idea)

Inefficient: The exclusivity prevents Inefficient: The exclusivity prevents brewer Y from using the lowest-cost brewer Y from using the lowest-cost distributor. distributor.

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The Test: in wordsThe Test: in words

If brewer b1 is excluded from If brewer b1 is excluded from dsitributor d1, does he use an dsitributor d1, does he use an undesirable distributor, d4, while undesirable distributor, d4, while everything else stays the same?everything else stays the same?

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The test: The test:

No Foreclosure

3: ME, d1 is now made exclusive, FORECLOSURE

b1

B1 had to go to d4, the undesirable distributor

B1 went to d4, but there’s other shifting going on too

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The Chicago Beer MarketThe Chicago Beer Market

All Anheuser distributors just All Anheuser distributors just distribute Anheuserdistribute Anheuser

Half of Miller distributors just Half of Miller distributors just distribute Millerdistribute Miller

So Asker compares the Miller-So Asker compares the Miller-exclusive and the non-Miller-exclusive exclusive and the non-Miller-exclusive marketsmarkets

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DistributorsDistributors

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Territories (a brewer must by Territories (a brewer must by law give exclusive territories)law give exclusive territories)

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Identification Problems: How Identification Problems: How might Miller-exclusive markets might Miller-exclusive markets

be special? be special? 1. Strong dislike for beer there1. Strong dislike for beer there 2. Miller exclusive distributors are the 2. Miller exclusive distributors are the

ones good at promotionones good at promotion ForeclosureForeclosure

Me: Is there any reason why Miller Me: Is there any reason why Miller might only want low-cost distributors might only want low-cost distributors to be exclusives? to be exclusives?

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THE DATATHE DATA Scanner data for grocery sales, n=138,213Scanner data for grocery sales, n=138,213

Household income and age by zip code, Household income and age by zip code, from the Census (Age not used, it seems)from the Census (Age not used, it seems)

Distributor areas from the Illinois govt. Distributor areas from the Illinois govt.

Which deals are exclusive: vague sourcesWhich deals are exclusive: vague sources

(address wrong in the paper)http://www.gsb.uchicago.edu/kilts/research/db/dominicks/

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A BLP ModelA BLP Model

Each consumer type buys one unit of Each consumer type buys one unit of beer per week (everybody buys the beer per week (everybody buys the same quantity, or zero)same quantity, or zero)

Instruments for Price: prices lagged Instruments for Price: prices lagged and led by 4 weeksand led by 4 weeks

That’s to avoid the effect of a week’s That’s to avoid the effect of a week’s price being high because there is a price being high because there is a lot of advertising (unobservable) that lot of advertising (unobservable) that weekweek

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Two-Step Procedure (p. 17)Two-Step Procedure (p. 17) What if cost unobservables are correlated with What if cost unobservables are correlated with

demand unobservables? Example: People like demand unobservables? Example: People like Green Beer on St. Patrick’s Day, but it is costly to Green Beer on St. Patrick’s Day, but it is costly to color the beer green. color the beer green.

Then we’d think the mark-up was higher on St. Then we’d think the mark-up was higher on St. Patrick’s day (more market power), but we’d be Patrick’s day (more market power), but we’d be wrong. wrong.

So, instrument for price using our first-stepSo, instrument for price using our first-step cost estimate cost estimate

Using a two-step procedure we need to adjust the Using a two-step procedure we need to adjust the standard errors for the extra stage errorstandard errors for the extra stage error

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DataData 138,213 observations on price and sales138,213 observations on price and sales 73 brands, 12 brewers, 71 stores, 42 distributions (Table 1)73 brands, 12 brewers, 71 stores, 42 distributions (Table 1)

Consumer prices from .19 to 2.97, mean .60Consumer prices from .19 to 2.97, mean .60 Retailer prices from .15 to 1.11, mean .50.Retailer prices from .15 to 1.11, mean .50.

Markups from -.34 to 2.49, mean 10 cents.Markups from -.34 to 2.49, mean 10 cents.

Market size– number of customers– is usually based on Market size– number of customers– is usually based on population. Here, it is number of shoppers for *any* population. Here, it is number of shoppers for *any* product, or a forecast of that number. product, or a forecast of that number.

Product characteristics: alcohol (4.4%), calories, serving Product characteristics: alcohol (4.4%), calories, serving size (keg vs. bottle). Light beer. Ice beer (see Table 5)size (keg vs. bottle). Light beer. Ice beer (see Table 5)

Whether there was a “promotion” or notWhether there was a “promotion” or not

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BLP and Logit (elasticity about BLP and Logit (elasticity about 3.4)3.4)

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.

logitLogit,IV BLP,IV BLP, IV

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Promotional Foreclosure Promotional Foreclosure (simple logit)(simple logit)

Excluded:Excluded AB:

Excluded brewersGet MORE sales!

So there is noForeclosure.

What is happening?

ID problem:

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Promotional Foreclosure (simple logit)Promotional Foreclosure (simple logit)

All Exclusive Markets: a product sold by a distributor who only sells in markets whereBoth Miller and AB use exclusive contracts.

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Cost-based foreclosure (simple Cost-based foreclosure (simple logit)logit)

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2020

A link to the course websiteA link to the course website

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