Working Paper

Winners and losers of higher minimum wages. Empirical Evidence from U.S. Grocery Retailing. Link


Minimum wage policies intended to increase consumer income can have two unintended consequences. First, firms may raise their prices because of higher demand and costs, which means that consumers do not benefit as much as intended. Second, although firms can benefit from higher demand following the minimum wage increase, they also face higher costs, which they may fully no pass-on to consumers. How prices and profits change depends, \textit{inter alia}, on consumer demand and the level of competition in local markets. In our paper, we combine a structural demand and supply model with a difference-in differences approach to answer two questions: How much of the minimum wage do retailers pass-on to consumer prices? Do retailers benefit from higher demand following the income increase or experience lower profits due to higher costs? Our results indicate a pass-on rate of 70\% from minimum wages to consumer prices meaning that minimum wages are not as effective as intended. However, retailers protect consumers from an even higher prices by absorbing part of the costs increase in their markups.

The Price(s) of Variety. Empirical Evidence from the French Biscuit Market 

This empirical study aims at shedding light on how the variety decisions of retailers affect the profit sharing in their bilateral relationships with manufacturers. To this extent, we study the biscuit market, where variety is an important determinant of consumer welfare and develop a supply model on the vertical relationship between retailers and manufacturers that explicitly considers strategic retail decisions on store variety. The number of products offered by the retail stores affects consumer choices, which establishes a link between consumer preferences for variety and the product line length. Bargaining on wholesale prices and retail price decisions happen subsequent to the retail variety choice, which allows to analyze the effect of variety on retail- and wholesale prices. We find that due to variety retailers get a larger slice from a larger pie---meaning that both the total industry profits and the retail profit share positively correlate to larger variety. In a next step, we quantify the effect of how retail and wholesale prices change with retail variety. Finally, we implement several counterfactuals to investigate how retailer buyer power---due to (i) retail mergers, (ii) increase in private label shares, and (iii) dynamic bargaining tactics---affects the retailers' choice of product variety in their stores.


Submissions 

When Do Switching Costs Lower Prices? Multi-Product Ownership and the Dynamic Edgeworth Effect [Latest Version]


In many markets, a single firm sells two products that share customers but differ sharply in switching costs: a familiar brand with strong consumer attachment, and an alternative (e.g., private labels, generics, budget sub-brands) where attachment is weak or absent. When only the brand carries meaningful switching costs, the firm has an incentive to keep the alternative's price high: this steers first-time buyers toward future brand lock-in. We formalize this incentive, the dynamic Edgeworth effect, in a structural model of invest-and-harvest pricing under both single-product and multi-product ownership. It overturns the textbook prediction that switching costs hold introductory prices down; the same logic applies to any asymmetry in the firm's harvesting margins. We estimate the model on household scanner data from the German diaper market, where switching costs are 38\% of the average brand price; the price-lifecycle pattern replicates in US scanner data on baby food, diapers, and pet food. Counterfactuals show a sign reversal: switching costs are pro-competitive when each product has a different owner, but anti-competitive when one firm owns both. Removing switching costs lowers average prices by 0.5--5.9% under multi-product ownership. Decomposing this multi-product price premium itself, the dynamic Edgeworth effect contributes roughly 12--40% relative to single-product competition. Switching costs are therefore most likely anti-competitive under multi-product ownership---an observable market feature that applies to a broad class of markets, such as pharmaceuticals, telecoms, banking, and consumer goods.



Publications (3 top-field, ranked A according to CNRS) 

Local Market Structure and Consumer Prices: Evidence from a Retail Merger, with Jan Philip Schain & Joel Stiebale 

In this article, we conduct an ex-post evaluation of a merger between two German grocery retailers. The bad news is: consumer prices increased due to greater retail market power (7% for the regions with the largest predicted increase in retail concentration). The good news is that merger efficiencies in retailing exist and can finally be measured. with our novel methodology. We find that prices declined in regions that did not see a rise in retail concentration but were potentially affected by cost savings within the merged entity. Overall, the merger raised average consumer prices by only a small amount (about 0.4%) given that market power effects and efficiency gains cancel out at the national level. However, there are distributional effects: Regions with high competition (mainly cities) are less affected by increased market power and benefit more from efficiency gains, which implies that the merger hurt consumers in rural areas most. 


How Resale Price Maintenance and Loss Leading affect Upstream Cartel Stability: Anatomy of a Coffee Cartel, joint with Emanuel Holler 

In many recent cases (e.g., coffee, sweets, pet food, beer, beauty and personal hygiene, baby food, and baby cosmetics), we observe that producers collude on wholesale prices AND include retailers into the cartel by also raising prices retail prices (i.e., resale price maintenance). This is puzzling at first: Why would producer cartels want to raise final consumer prices? This is counterintuitive because the producer cartel collects profits from collusive wholesale prices times demand. But demand is decreasing in final retail prices, which likely reduces profits. In our study, we provide empirical evidence (testing predictions of Hunold & Muthers, 2021) that the producer cartel needs to involve retailers into the cartel (by raising retail prices and share part of the profits) because the retailer would refuse collusive wholesale prices without participating through resale price maintenance. 

NB: In the paper, we refer to two court decisions by the Higher Court of Appeal. Our translations can be found here: [OLG Translation 2014] [OLG Translation 2018]


Vertical Restraints, Pass-Through, and Market Definition: Evidence from Grocery Retailing, with Justus Haucap, Ulrich Heimeshoff, Gordon J. Klein & Christian Wey, 

Pass-through rates are widely discussed in the economic literature, e.g., in cartel damage claims or optimal taxation. We show that pass-through rates can also have significant effects in market definition exercises if industries are vertically structured. In general, higher pass-through rates lead to larger upstream market definitions according to the SSNIP test. Taking the example of grocery retailing, upstream markets (at the manufacturer level) can easily be defined too widely if the assumed pass-through rates are too high and vice versa. We illustrate our theoretical considerations with a detailed empirical analysis of German retailing markets (see Figure 3 for a graphic summary).