Competitive Effects of Vertical Restraints and Promotional Activity
Total Page:16
File Type:pdf, Size:1020Kb
COMPETITIVE EFFECTS OF VERTICAL RESTRAINTS AND PROMOTIONAL ACTIVITY DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Kirk W. Kerr, M.A. ***** The Ohio State University 2008 Dissertation Committee: Approved by Howard P.Marvel, Adviser James Peck Adviser Matthew S. Lewis Graduate Program in Economics ABSTRACT This dissertation empirically analyzes firm distribution and promotion strate- gies. Chapter 2 examines the distribution of products through exclusive territory arrangements by developing a model in which manufacturers, producing for uncertain retail demand, utilize exclusive territories to ensure that all demand states, and retailers serving particular demand states, are served. Here exclusive territories result in higher prices, greater consumption, and the entry of small retailers such as convenience and drug stores to the retail market. Analyzing a natural experiment afforded by Indiana’s legalization of exclusive territories in beer distribution, I estimate the effect of exclusive territories on price and con- sumption using a difference-in-differences model. I find that the legalization of exclusive territories in Indiana results in no change in prices or consumption. I also analyze a unique dataset of all licensed beer sellers in Indiana and find that exclusive territories did not cause significant entry by convenience or drug stores. In Chapter 3, I argue that retail promotions arranged by manufacturers offer researchers a window into the competitive interactions of oligopolistic manufac- turers. Utilizing scanner data on sales and promotions at a major grocery store, I estimate the long-term effect of promotions on the sales of leading brands in 10 consumer packaged-goods categories. By testing the sales time series for unit ii roots, I find that promotions may have long-term effects on the sales of several brands in each category. By estimating the persistent impact of a brand’s own promotions and the impact of competitors’ promotions, I find that in some cases promotions have persistent positive impacts on sales, but these effects are small and greatly diminished by competitor promotions. The final chapter utilizes retail promotions and prices to analyze the com- petitive interactions of leading manufacturers in 10 consumer packaged-good categories. Variables on competitor activity in other shared markets are in- cluded in reaction functions to evaluate whether firms respond across as well as within markets. Reactions to out of market promotions and price changes are small or zero, indicating that firms do not respond across markets. iii c Copyright by Kirk W. Kerr 2008 To Kathy, who believed in me when I did not v ACKNOWLEDGMENTS I wish to thank my advisor, Howard Marvel, for his constant intellectual sup- port and patience. I am particularly grateful to him for helping me form general ideas about economics into more precise research questions. It was his intro- duction to Industrial Organization and Antitrust Economics that inspired my interest in the field, and his guidance as an advisor that has led to completion of this research project. He has provided the intellectual push to improve and refine my ideas that is necessary for the completion of any research project. I would like to thank Matt Lewis for his help and insight into empirical Industrial Organization. After teaching one of the most interesting classes I have ever taken, he has helped me to understand how to conduct empirical research. Many thanks to James Peck, for his patience in helping me to learn Game Theory, a topic of great importance in this field, and great difficulty to me. The entire faculty and staff of the Ohio State University Economics Depart- ment deserve a great deal of praise in helping me negotiate the graduate pro- gram. I would like to especially mention our Director of Graduate Studies, Hajime Miyazaki, a tireless advocate for Economics Graduate students. I would like to thank Ana Shook for her constant good humor and encouragement and vi John-David Slaughter for ensuring that the Department and its computers op- erate smoothly. I wish to thank Joseph Haslag of the University of Missouri. Without his example and encouragement, I would not have pursued my graduate studies in Economics. Also, Michael Podgursky, who first exposed me to economic re- search. I have many friends who have made the path to completion brighter. Leonard Kiefer, Karl Meeusen, Mark Longbrake, Kate Snipes, and Carlos Alpizar made surviving the difficult first year possible. Nels Christensen, for our many discus- sions about life and Economics, and for Starbucks runs. Kathleen Deloughery and Jennifer Shand Pitzer, for good humor in the computer lab. I wish to make special mention of Tom Dolan, who befriended me soon after I arrived in Columbus. Tom has offered advice, perspective, and friendship throughout my time at Ohio State. I thank my parents, Wendell and Debra Kerr, for supporting me through the difficult ordeal of graduate school. Graduate School has been full of chal- lenges and they have supported every step of the way, building me up after each disappointment. They have helped me remember why I started and given me the confidence that I could finish. Lastly, I wish to thank my wife, Kathy. She has provided the encouragement and example that I needed to complete this research. vii VITA October 10, 1977 . Born - Granada Hills, CA 2001 . B.S. Economics, University of Missouri- Columbia 2002 . M.A. Economics, University of Missouri- Columbia 2003 . M.A. Economics, The Ohio State Uni- versity 2002-present . Graduate Teaching and Research Asso- ciate, The Ohio State University FIELDS OF STUDY Major Field: Economics viii TABLE OF CONTENTS Page Abstract . ii Dedication . v Acknowledgments . vi Vita . viii List of Tables . xi List of Figures . xix Chapters: 1. Introduction . 1 2. Exclusive Territories in Beer Distribution: The Impact of Indiana’s Beer Baron Rule . 4 2.1 Introduction . 4 2.2 Theory and Evidence on Exclusive Territories . 6 2.3 The Model . 10 2.4 The Data . 15 2.5 Results . 18 2.6 Conclusion . 24 3. Do Retail Promotions have Persistent Effects? An Anaylsis of Dominick’s Finer Foods Scanner Data . 29 3.1 Introduction . 29 3.2 Economics of Promotions . 30 ix 3.3 Methodology . 34 3.4 Data . 37 3.5 Results . 39 3.6 Conclusion . 48 4. Do Firms React across Markets? An Anaylsis using Dominick’s Finer Foods Scanner Data . 51 4.1 Introduction . 51 4.2 Literature Review . 52 4.3 Data . 57 4.3.1 Price Index . 61 4.3.2 Out of Market variables . 61 4.4 Model & Results . 63 4.4.1 Promotions reaction functions . 65 4.4.2 Price Reaction Functions . 67 4.5 Conclusion . 68 5. Conclusion . 69 Appendices: A. Tables for ’Do Retail Promotions have Persistent Effects?’ . 72 B. Figures for ’Do Retail Promotions have Persistent Effects?’ . 118 C. Tables for ’Do Firms React Across Markets?’ . 153 x LIST OF TABLES Table Page 2.1 License and Store types, 2002 . 17 2.2 License and Store types, 2004 . 17 2.3 Explanation of variables and sources . 19 2.4 Summary Statistics . 20 2.5 Indiana Off-Premises Beer Licenses:1992-2007 . 21 2.6 Store types: 2001- 2007 . 21 2.7 Entry and Exit for Indiana Retail Beer Market, 2002-2007 . 22 2.8 Entry of Convenience and Drug Stores, 2002-2007 . 23 2.9 Supply and Demand regressions . 25 2.10 Reduced-form Regressions . 26 3.1 Augmented Dickey-Fuller Test: Toilet Paper . 42 3.2 Brands with a Unit Root, by Category . 44 3.3 Univariate Impulse Responses: Toilet Paper . 45 3.4 Persistent Impulse Response to Promotional Shocks: Charmin toi- let paper . 47 3.5 Cumulative Response to Promotional Shocks . 49 xi 4.1 Categories and Manufacturers . 60 A.1 Manufacturers and Brands by Category . 73 A.2 Manufacturers and Brands by Category . 74 A.3 Augmented Dickey-Fuller Test: Paper Towels . 75 A.4 Augmented Dickey-Fuller Test: Liquid Dish Soap (Hand) . 76 A.5 Augmented Dickey-Fuller Test: Liquid Dishwasher Soap . 76 A.6 Augmented Dickey-Fuller Test: Powder Dishwasher Soap . 76 A.7 Augmented Dickey-Fuller Test: Fabric Softener Sheets . 77 A.8 Augmented Dickey-Fuller Test: Liquid Fabric Softener . 77 A.9 Augmented Dickey-Fuller Test: Liquid Laundry Detergent . 77 A.10 Augmented Dickey-Fuller Test: Powder Laundry Detergent . 78 A.11 Augmented Dickey-Fuller Test: Toothpaste . 78 A.12 Univariate Impulse Responses: Paper Towels . 79 A.13 Univariate Impulse Response: Liquid Dish Soap (Hand) . 80 A.14 Univariate Impulse Response: Liquid Dishwasher Soap . 81 A.15 Univariate Impulse Response: Powder Dishwasher Soap . 81 A.16 Univariate Impulse Response: Fabric Softener Sheets . 82 A.17 Univariate Impulse Response: Liquid Fabric Softener . 82 A.18 Univariate Impulse Response: Liquid Laundry Detergent . 83 A.19 Univariate Impulse Response: Powder Laundry Detergent . 84 A.20 Univariate Impulse Response: Toothpaste . 85 xii A.21 Persistent Impulse Response to Promotional Shocks: Charmin toi- let paper . 86 A.22 Persistent Impulse Response to Promotional Shocks: Dominick’s toilet paper . 87 A.23 Persistent Impulse Response to Promotional Shocks: Hi Dri paper towels . 88 A.24 Persistent Impulse Response to Promotional Shocks: Dominick’s paper towels . 89 A.25 Persistent Impulse Response to Promotional Shocks: Brawny pa- per towels . 90 A.26 Persistent Impulse Response to Promotional Shocks: Ajax liquid dish soap . 91 A.27 Persistent Impulse Response to Promotional Shocks: Dawn liquid dish soap . 92 A.28 Persistent Impulse Response to Promotional Shocks: Ivory liquid dish soap . 93 A.29 Persistent Impulse Response to Promotional Shocks: Joy liquid dish soap . 94 A.30 Persistent Impulse Response to Promotional Shocks: HH liquid dish soap . 95 A.31 Persistent Impulse Response to Promotional Shocks: Palmolive liquid dishwasher soap .