Producer And RETailer markets OrganizationPARETO (PARETO)

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Consumers are currently affected by an unprecedented rise in inflation and this increase has been particularly severe in food and retail markets. This phenomenon relates to exogenous shocks, such as the COVID-19 crisis, but it may also respond to specific regulation or the exercise of market power at different levels of the retail chain. Not all countries and product markets are equally affected and this raises the question of why there exist heterogeneous effects. The goal of this project is to better document and understand this heterogeneity and to derive recommendations for economic policy. We focus on how the Producer And RETail market Organization (PARETO) in several product categories and countries drives these effects. For this purpose, we will develop novel theories and exploit unique cross-country scanner and production data that has only recently become available. We divide our project into four work packages (WP). WP1 starts by documenting facts about pricing heterogeneity across countries, producers and retailers and attempts to identify the type of consumers that have been most affected by inflation. We estimate how different cost shocks faced by firms, such as changes in energy costs and taxes, translate into producer and consumer prices. Then, we ask what determines this pass-through of costs to prices and how policy makers can use this information to fight inflation. WP2 deals with producers’ and retailers’ market power, i.e. their ability to influence market prices and charge markups above their average costs. We will analyze whether the increase in markups that has been found in the US can also be observed in Europe, how and why it varies across markets and different levels of the vertical chain. We then study how policies that reveal additional information to consumers, e.g. about the nutritional content of retail products or producer margins, affect firms’ market power. WP3 has a methodological focus and deals with the question of how interdependencies between multiple unit of goods or multiple product categories can be modelled. These interdependencies are essential in retail markets where consumers often conduct most of their purchases in a single store. We will analyze how these interdependencies affect pricing strategies, the division of profit between retailers and producers, as well as the impact of regulatory policies. WP4 takes a dynamic perspective and analyzes the entry and exit of retailers and products with a particular focus on the rise of online retailing and the entry of hard discounters in different countries. We also study how different pricing schemes between retailers and producers, buyer power, mergers and buyer groups affect product entry and exit. The inflation resilience of households crucially depends on the producer-seller network and the ability of consumers to adjust their consumption following a price increase.