Concentration, Vertical Relations, and Innovation. Examination through the Lens of Structural Models – ConVertIno

Amid the evolution of corporate giants, the focus of researchers, policy makers, and the media shifted to understand how such increased concentration affects consumers and small producers. The grocery industry has received a lot of attention because of (i) higher concentration levels than in other sectors and (ii) its market structure which involves vertical relations with some large producers (Nestle, Unilever, etc.) selling to consumers through large retailers (Carrefour, Casino, etc.). Concentration in these markets can have detrimental effects for consumers and for small producers, such as farmers. The French EGALIM law is a prominent example of how governments worldwide establish laws to protect consumers and small producers from unfair trading practices of large retailers and large producers.

In theory, however, instead of being negative for consumers, industrial concentration (dominant producers and retailers) could also be a sign of greater competition, where the most efficient firms, that have the lowest costs, gain market shares. This type of concentration is beneficial for consumers as, in that case, firms pass-on cost-savings to consumers in form of lower prices or new and improved products (i.e., more innovation). The economic literature, however, has not yet fully understood how producer concentration and retailer concentration affect prices, profits, profit-sharing, and innovation.

Our project intends to shed new light on this question using innovative structural models and large data sets. We will investigate how retail concentration and producer concentration interact, and quantify the effects on prices, profits, profit-sharing and innovation. The aim is to provide empirical evidence for policy makers on how to regulate contracts between producers and retailers to (i) protect consumers and small producers and (ii) lift innovation constraints.