Wholesale Price Discrimination: Inference and Simulation

Abstract

In this paper we make inferences about wholesale price discrimination and uniform wholesale pricing policy. This is an important question when there is a policy goal to enforce uniform wholesale price legislation in a variety of markets and we address this question by simulating the effects of such uniform wholesale price legislation in a local urban grocery retail market of the United States. Given a demand and supply model of multiple retailers' and manufacturers' oligopoly-pricing behavior we consider: (i) wholesale price discrimination and (ii) no wholesale price discrimination (via uniform price regulation). We demonstrate how wholesale price legislation simulations may be performed given observed data on retail and input prices and retail quantities sold and not available data on wholesale prices. We focus our approach using data on yogurt produced by multiple manufacturers and sold in several stores, and estimate there to be positive welfare effects from preventing wholesale price discrimination, originating from positive effects on consumer surplus although negligible effects on joint vertical producer surplus, resulting from counter balancing negative effects on manufacturer and positive effects on retailer surplus.