Neoclassical explanations of vertical organization and performance of food Industries

This paper examines the exercise of market power in vertical marketing channels in a more general and novel fashion than prior research. Neoclassical models arising from the work of Adam Smith, George Stigler, Harold Demsetz, and John Spengler are presented in juxtaposition to the more commonly advanced agency theoretic explanation of vertical organization and performance. The paper 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% of supermarket sales in the U.S., portends a possible shift to the European model wherein food retailers develop and promote their own brands. [EconLit Citations: L13,Q13].