On the endogeneity of retail markups in an equilibrium analysis: A control-function approach

Vardges Hovhannisyan, Kyle W. Stiegert, Marin Bozic

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

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 languageEnglish (US)
Pages (from-to)188-200
Number of pages13
JournalJournal of Agricultural and Resource Economics
Volume39
Issue number2
StatePublished - Aug 1 2014

Keywords

  • Benefit function
  • Conjectural variation
  • Control function
  • Retail conduct
  • Retail markup endogeneity

Fingerprint Dive into the research topics of 'On the endogeneity of retail markups in an equilibrium analysis: A control-function approach'. Together they form a unique fingerprint.

Cite this