VERTICAL RELATIONSHIPS IN THE READY-TO-EAT BREAKFAST CEREAL MARKET: A BRAND-SUPERMARKET LEVEL ANALYSIS

The purpose of this paper is to examine the vertical relationship between the manufacturers of ready-to-eat cereals (RTEC) and the retailers in the Boston area. The study uses highly disaggregated (supermarket and brand level ) monthly data from Information Resources Inc (IRI) from 1995 to 1997.The Logit model is used to estimate the demand for 37 brands of RTEC in the top four supermarkets in the Boston area. The demand estimates are then used to compute the price-cost margins (PCM) for retailers and manufacturers under different vertical scenarios, including vertical Nash double marginalization, non-linear pricing, vertical integration, and collusion. The results of the study shed light on the power each agent (manufacturers and retailers) has to set the price of RTECs in the Boston market, and assess inter- and intra-brand substitution among brands of different manufacturers.