Bargaining Power Revealed by Wholesale Prices

Abstract

We reveal bargaining power between upstream manufacturers and downstream supermarkets using proprietary data on product-specific wholesale and retail prices of the two largest supermarket chains in Chile. We study two dimensions of players’ bargaining power: the share of total profits each earns, and the risk exposure to cost shocks each bears. We focus on the coffee industry to take advantage of the idiosyncratic features of the market that facilitate measuring bargaining poer. We find that Nestle, who accounts for almost 80% of the market, obtains about 70% of the total profits generated by their products in both retailers, while non-Nestle manufacturers obtain between 30% and 50% despite their small market shares. We see this as direct evidence of bargaining power driven by brand differentiation rather than market size. Regarding risk exposure, we find that less than 20% of cost shocks are pass-through to wholesale prices. Despite important supermarket-specific heterogeneity, we observe small manufacturers absorbing more risk than larger players.