Journal of Agricultural and Resource Economics
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The endogeneity of retail markups arises due to the correlation between the markups and unobserved costs in the retail pricing equation. This correlations may be a result unobserved product quality affecting both price and markups. Despite inconsistency resulting from markup endogeneity, it has long been ignored in the equilibrium analysis of retail behavior. We account for retail markup endogeneity using a control-function approach in which controls are derived from empirical evidence in the marketing literature. Furthermore, we adopt three test procedures to evaluate this endogeneity and apply our method in an econometric analysis of retail market behavior in the marketing of yogurt in the United States. The results provide strong statistical evidence for the fact that markup endogeneity has been overlooked, resulting in upward bias in retail markups.
This article provides a structural framework for studying the market performance of various food industries. It revisits the benefit-function approach to modeling demand and extends its application to the empirical industrial-organization literature. We illustrate the empirical value of our model in an econometric analysis of competitive conditions in the retail market for branded yogurt. The results show that retailers are engaged in imperfect competition. Furthermore, national brand yogurt remains an important tool for retail profitability.
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