A Dual-Stage View of the Consumer Goods Economy

Abstract

tries I became increasingly aware of certain disconnections between what I and countless other business people had observed and the predictions of the conventional, neoclassical economics I had learned in college and graduate school. The initial result was an article that reflected this experience (Steiner 1973). Subsequently, to refresh my somewhat out-of-date skills, I concentrated my energies on revisiting the theoretical literature and investigating the historical record with particular focus on the determinants of the margins and prices of consumer goods makers and of the firms that distribute their output to household consumers. The end product has been the development of an informal model that endeavors to account for the margins and pricing practices of firms in various frequently encountered, real world industry structures. The approach is primarily inductive: find out what happens and develop a theory that explains it. In a dual-stage world both manufacturers and retailers have varying degrees of market power, and retailers seldom buy or resell as perfect competitors. Although the analysis uses conventional neoclassical tools, it generates important predictions that are contrary to those found in the manufacturer-oriented, single-stage models typically employed in neoclassical theory. In single-stage models the manufacturer is positioned as the firm and appears to sell directly to household consumers or to deal with them through an inert and perfectly competitive distribution system. Since, in the words of Heflebower (1968, 49), the wholesale/retail markets that intervene between consumer goods makers and household consumers are implicitly assumed to be analytically neutral, it follows The author is an economist and consultant in Washington, DC. He would like to thank Paul Farris and Michael Lynch for their helpful comments on an earlier draft and Linda Herrickfor the information she provided on drug wholesaling.