Abstract
The diverging interests of manufacturers and retailers famously give rise to the double marginalization problem, but have consequences far beyond pricing. In this paper we analyze if and how a strategic retailer adjusts prices in the presence of manufacturer advertising. We refer to this adjustment as advertising pass-through. We present a simple model to build intuition about how a retailer strategically reacts to manufacturer advertising. Then we examine empirically the relationship between retail prices and manufacturer advertising for a large set of products across eleven product categories. We show that retail prices change over and above what is expected after accounting for the changes in wholesale prices. Moreover, the effect advertising has on sales through its impact on retail pricing is an order of magnitude larger than its direct effect on sales (as reflected in the advertising elasticities). The estimated advertising pass-though rates are not only of sizable magnitude but also vary considerably across products and categories. To explain this variation we relate the obtained pass-through rates to a number of product and category characteristics.
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