Abstract: We examine the extent to which vertical and horizontal market structure can
together explain incomplete pass-through. We develop a model that highlights
the interactions between horizontal and vertical structure and their effects on
pass-through from commodity to wholesale prices and wholesale to retail prices.
Using scanner data from a large U.S. retailer, we estimate product level pass-through
rates for three different vertical structures: national brands, private label
goods not manufactured by the retailer and private label goods manufactured
by the retailer. We find that greater control of the value chain by the retailer results
in higher commodity price pass-through into retail prices compared to national
brands – 40% higher for private label manufactured goods and 10% higher
for private label non-manufactured goods. We also find substantial effects of
horizontal structure on pass-through – products and brands with higher market
shares have higher retail markups and lower cost pass-through. Our results
emphasize that accounting for both vertical and horizontal structure is important
for understanding how market structure affects pass-through, as a reduction
in double-marginalization can raise pass-through directly but can also reduce it
indirectly by increasing market share.
Keywords: pass-through; market structure; market power; pricing; retail; vertical integration; intra-firm; private labels;
JEL Classification: D4; E3; E31