Own-brand and Cross-brand Retail Pass-through

Own-brand and Cross-brand Retail Pass-through In this paper we describe the pass-through behavior of a major US supermarket chain for 78 products across 11 categories. Our data set includes retail prices and wholesale prices for stores in 15 retail price zones for a one-year period. For the empirical model, we use a reduced-form approach that focuses directly on equilibrium prices as a function of exogenous supply and demand-shifting variables. The reduced-form approach enables us to identify the theoretical pass-through rate without specific assumptions about the form of consumer demand or the conduct of a category pricing manager. Thus, our measurements of pass-through are not constrained by specific structure on the underlying economic model. The empirical pricing model includes costs of all competing products in the category on the right hand side, not only the cost of the focal brand, and yields estimates of both own brand and cross brand pass-through rates. Our results provide a rich picture of the retailer’s pass-through behavior. We find that passthrough varies substantially across products and across categories. Own brand pass-through rates are, on average, more than sixty percent for nine of eleven categories, a finding that is at odds with the claims of manufacturers about retailers in general. Importantly, we find substantial evidence of cross brand pass-through effects, indicating that retail prices of competing products are adjusted in response to a change in the wholesale price of any given product in the category. We find that cross brand passthrough rates are both positive and negative. We explore determinants of own brand and cross brand pass-through rates and find strong evidence in multiple categories of asymmetric retailer response to trade promotions on large versus small brands. For example, brands with larger market shares, and brands that contribute more to retailer profits in the category, receive higher pass-through. We also find that trade promotions on large brands are less likely than small brands to generate positive cross brand pass-through, i.e., induce the retailer to reduce the retail price of competing smaller products. On the other hand, small share brands are disadvantaged along three dimensions. Trade promotions on small brands receive low own brand pass-through and generate positive cross brand pass-through for larger competing brands. Moreover, small share brands do not receive positive cross pass-through from trade promotions on these larger competitors. We also find that store brands are similarly disadvantaged with respect to national brands.