Network Externalities in Supermarket Retailing
Presented by:
Timothy Richards
Arizona State University
Morrison School of Agribusiness and Resource Management
Friday, September 19, 2008
12:00 pm-1:30 pm
Bakken-Schaars Room (RmB30)
Supermarkets face a two-sided demand for shelf space: consumers demand variety and manufacturers demand shelf-space, while consumers pay retail prices and manufacturers pay access fees. The resulting indirect network effects are estimated using a CES / nested logit model of demand and a non-linear vertical pricing model. The model is applied to retail scanner data for a “shopping basket” of items from competing supermarket retailers. Results show that retail margins rise in the number of SKUs offered by retailers, while the price of shelf-space falls as consumers are able to internalize the network externalities generated by product variety, while manufacturers cannot.