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1 G604 IO II G604 IO II Eric Rasmusen, erasmuse@indiana.edu Eric Rasmusen, erasmuse@indiana.edu 11 April 2006 11 April, Tuesday. Exclusive Dealing John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU. "Diagnosing Foreclosure Due to Exclusive Dealing,""Diagnosing Foreclosure Due to Exclusive Dealing," Do this with overheads, not a comptuter projector Do this with overheads, not a comptuter projector

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2Readings 11 April, Tuesday. Exclusive Dealing John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU. 11 April, Tuesday. Exclusive Dealing John Asker, "Diagnosing Foreclosure Due to Exclusive Dealing," October 14, 2004, Leonard N. Stern School of Business, NYU."Diagnosing Foreclosure Due to Exclusive Dealing,""Diagnosing Foreclosure Due to Exclusive Dealing,"

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3 Do Exclusive-Dealing Contracts Hurt the Excluded Firms? Brewers sell beer to distributors, who resell to retailers (e.g., grocery store chains) Brewers sell beer to distributors, who resell to retailers (e.g., grocery store chains) If brewer X requires a distributor to sell only Xs beer, does brewer Y end up with a higher-cost distributor? If brewer X requires a distributor to sell only Xs beer, does brewer Y end up with a higher-cost distributor?

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4 Suppose brewer X requires distributor G to sell only Xs beer, and brewer Y end up with a higher-cost distributor, H Suppose brewer X requires distributor G to sell only Xs beer, and brewer Y end up with a higher-cost distributor, H Efficient: The exclusivity reduces Gs costs (Telser, Klein idea) Efficient: The exclusivity reduces Gs costs (Telser, Klein idea) Inefficient: The exclusivity prevents brewer Y from using the lowest-cost distributor. Inefficient: The exclusivity prevents brewer Y from using the lowest-cost distributor.

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5 The Test: in words If brewer b1 is excluded from dsitributor d1, does he use an undesirable distributor, d4, while everything else stays the same? If brewer b1 is excluded from dsitributor d1, does he use an undesirable distributor, d4, while everything else stays the same?

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6 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 theres other shifting going on too

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7 The Chicago Beer Market All Anheuser distributors just distribute Anheuser All Anheuser distributors just distribute Anheuser Half of Miller distributors just distribute Miller Half of Miller distributors just distribute Miller So Asker compares the Miller-exclusive and the non-Miller-exclusive markets So Asker compares the Miller-exclusive and the non-Miller-exclusive markets

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8 Distributors

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

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10 Identification Problems: How might Miller-exclusive markets be special? 1. Strong dislike for beer there 1. Strong dislike for beer there 2. Miller exclusive distributors are the ones good at promotion 2. Miller exclusive distributors are the ones good at promotion Foreclosure Foreclosure Me: Is there any reason why Miller might only want low-cost distributors to be exclusives? Me: Is there any reason why Miller might only want low-cost distributors to be exclusives?

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11 THE DATA Scanner data for grocery sales, n=138,213 Scanner data for grocery sales, n=138,213 Household income and age by zip code, from the Census (Age not used, it seems) Household income and age by zip code, 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 sources Which deals are exclusive: vague sources (address wrong in the paper) http://www.gsb.uchicago.edu/kilts/research/db/dominicks/

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12 A BLP Model Each consumer type buys one unit of beer per week (everybody buys the same quantity, or zero) Each consumer type buys one unit of beer per week (everybody buys the same quantity, or zero) Instruments for Price: prices lagged and led by 4 weeks Instruments for Price: prices lagged and led by 4 weeks Thats to avoid the effect of a weeks price being high because there is a lot of advertising (unobservable) that week Thats to avoid the effect of a weeks price being high because there is a lot of advertising (unobservable) that week

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13 Two-Step Procedure (p. 17) What if cost unobservables are correlated with demand unobservables? Example: People like Green Beer on St. Patricks Day, but it is costly to color the beer green. What if cost unobservables are correlated with demand unobservables? Example: People like Green Beer on St. Patricks Day, but it is costly to color the beer green. Then wed think the mark-up was higher on St. Patricks day (more market power), but wed be wrong. Then wed think the mark-up was higher on St. Patricks day (more market power), but wed be wrong. So, instrument for price using our first-step So, instrument for price using our first-step cost estimate cost estimate Using a two-step procedure we need to adjust the standard errors for the extra stage error

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14 Data 138,213 observations on price and sales 138,213 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.60 Consumer 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 population. Here, it is number of shoppers for *any* product, or a forecast of that number. Market size– number of customers– is usually based on population. Here, it is number of shoppers for *any* product, or a forecast of that number. Product characteristics: alcohol (4.4%), calories, serving size (keg vs. bottle). Light beer. Ice beer (see Table 5) Product characteristics: alcohol (4.4%), calories, serving size (keg vs. bottle). Light beer. Ice beer (see Table 5) Whether there was a promotion or not Whether there was a promotion or not

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15 BLP and Logit (elasticity about 3.4) Y-variable: Market share. Note the use of small font for standard errors. Model B isnt rejected by C or D, using a chi-squared test for whether the het.coeffs are zero. logit Logit,IVBLP,IV

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16 Promotional Foreclosure (simple logit) Excluded: Excluded AB: Excluded brewers Get MORE sales! So there is no Foreclosure. What is happening? ID problem:

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17 Promotional Foreclosure (simple logit) All Exclusive Markets: a product sold by a distributor who only sells in markets where Both Miller and AB use exclusive contracts.

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18 Cost-based foreclosure (simple logit)

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20 A link to the course website http://www.rasmusen.org/g604/0.g604.htm

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