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Abstract

This article extends the Berry, Levinsohn, Pakes (1995) model to include retail services by Boston supermarkets in an equilibrium model of breakfast cereals and then tests alternative vertical pricing games between manufacturers and supermarkets to ascertain who’s got the pricing power. Empirical results show that retail services play a significant role in market equilibrium. Consumers are willing to pay for additional retail services embedded in their cereal purchases, especially those with higher income and no kids. Markups and market shares increase with the level of retail services, although manufacturers dominate pricing decisions in the market channel for breakfast cereals. Significant downward biases in price elasticities and markup estimates result when services are ignored.

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