Abstract
Examines the exercise of market power in vertical channels. Reviews the development of food systems over the past century. Presents neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz and John Spengler that are in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. Develops a structural model of price transmission in a channel that has differentiated product oligopolies at two stages. Increasing concentration at successive stages creates a problem of double marginalization. Vertical trading partners reduce it by avoiding vertical Nash (arms length) pricing via the use of trade promotions and other coordination methods such as private label. Finally, the rise in retail‐buyer concentration (six supermarket chains now control 52.6 percent of supermarket sales in the USA) portends a possible shift to the European model in which food retailers develop and promote their own brands.
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