Retailer, Manufacturers, and Individual Consumers: Modeling the Supply Side in the Ketchup Marketplace

The authors construct a model of the local ketchup market in a Texas city that accounts for household, manufacturer, and retailer decisions. That is, the model develops both demand and supply sides of the market. The authors model the demand side through a latent utility framework that allows for a no-purchase option. Accounting for both sides of the market enables the authors to check for any endogeneity problems on the demand side. They model the supply side through the profit-maximizing decisions of the manufacturers and a multiproduct retailer. Accounting for both the retailer and the manufacturer decisions enables the authors to evaluate the degree of manufacturer competition, retailer–manufacturer interactions, and retailer product-category pricing. Given the model assumptions and the market being studied, the authors find that not accounting for demand endogeneity can create bias in the estimation, the retailer seems to price below the static profit-maximizing prices for two of the three brands, and the inferred marginal wholesale prices are below the equilibrium uniform wholesale prices for two brands. The authors discuss the results with regard to channel bargaining, quantity discounts, and retailer category pricing.