Abstract
The endogeneity of retail markups arises due to the correlation between the markups and unobserved costs in the retail pricing equation. This correlation may be a result of 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.
Original language | English (US) |
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Pages (from-to) | 188-200 |
Number of pages | 13 |
Journal | Journal of Agricultural and Resource Economics |
Volume | 39 |
Issue number | 2 |
State | Published - Aug 1 2014 |
Bibliographical note
Publisher Copyright:Copyright 2014 Western Agricultural Economics Association.
Keywords
- Benefit function
- Conjectural variation
- Control function
- Retail conduct
- Retail markup endogeneity