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Retail Competition and the Dynamics of Demand for Tied Goods

Stanford Graduate School of Business, Stanford University, Stanford, California 94305
Stanford Graduate School of Business, Stanford University, Stanford, California 94305
hartmann_wesley{at}gsb.stanford.edu
harikesh.nair{at}stanford.edu

We present a demand system for tied goods incorporating dynamics arising from the tied nature of the products and the stockpiling induced by storability and durability. We accommodate competition across tied good systems and competing downstream retail formats by endogenizing the retail format at which consumers choose to stockpile inventory. This facilitates measurement of long-run retail substitution effects and yields estimates of complementarities within, and substitution across, competing systems of tied goods. We present an empirical application to an archetypal tied goods category: razors and blades. We discuss the implications of measured effects for manufacturer pricing when selling the tied products through an oligopolistic downstream retail channel and assess the extent to which retail substitution reduces channel conflict.

Key Words: tied goods; retail competition; dynamic discrete choice; durable good replacement; endogenous consumption; long-run effects; vertical channels; razor blade market
History: Received: December 11, 2007; accepted: May 14, 2009.