Price leadership within a marketing channel: A cointegration study

Abstract

Building upon a multiple-product channel structure, this paper develops a model to test channel price leadership on the basis of time series observations on retail and wholesale prices and using absence of double marginalisation as a criterion for channel price leadership. The model studies strategic pricing decisions in a two-stage (suppliers–retailers) channel, dealing with several products. Possible long-run relationships between wholesale and retail prices are investigated in relation to three cases. Case 1: suppliers have sufficient power vis-à-vis retailers to enforce double marginalisation; Case 2: retailers do not allow suppliers to enforce double marginalisation; and Case 3: one retailer not only keeps its suppliers from double marginalisation, but is also the horizontal price leader vis-à-vis competing retailers. We explicitly take the time series properties into account to derive the testable implications of strategic price interactions in marketing channels. An attractive feature of our methodology is that price leadership can be tested on the basis of time series on retail prices and wholesale prices only. The procedure for testing the long-run causality implications of the model uses the definition of long-run causality as formulated by Bruneau and Jondeau [Oxf. Bull. Econ. Stat. 61 (4) (1999) 545], but does not use their Wald statistic, which suffers from the undesirable properties of the Wald test when there are nonlinear parameter restrictions. To interpret restrictions on the common stochastic trends of retail and wholesale prices, we show that the common stochastic trends and the deviations from the long-run equilibriums must explicitly be assigned to variables in the channel model. If a common stochastic trend consists of both the retail price and the wholesale price of a product, then the suppliers are able to enforce double marginalisation vis-à-vis the retailers (Case 1). If a common stochastic trend consists solely of a product's wholesale price, then the retailers do not allow suppliers to enforce double marginalisation (Case 2). The opposite situation is a common stochastic trend consisting solely of a product's retail price. In this situation, one of the retailers not only keeps its suppliers from double marginalisation, but is also the horizontal price leader in the retail market for the product (Case 3). The model is applied to a typical multiple product channel allowing various vertical and horizontal interactions between the channel members to co-occur.