The broad objective of this project was to study the impact of supercenter competition (with supermarkets) on the structure and conduct of grocery retailing, building and evaluating appropriate industrial organization models of this competition. The project began with modeling of symmetric multiproduct retail markets that encompass supermarket choices of store penetration, in-store product variety, and product pricing. Impacts of vertical contracts (including "slotting fees") were studied, and salutary impacts of these contracts on product variety decisions were identified. Preliminary research was conducted on the impacts of alternate ownership structures for outcomes from multi-category (supercenter and mall) competition, identifying strategic reasons for the empirical observation of lower prices and lower product variety with supercenter (vs. supermarket) structures.

Do changes in food commodity prices have asymmetric effects on retail grocery prices? For years, farmers, consumer advocates and others have argued that grocery store prices rise rapidly in response to increases in commodity prices, but do not fall equally rapidly when commodity prices drop. We examine pricing in both stores that have regular sales and those that use everyday low pricing and rarely have sales. For both types of stores, we find very little evidence for asymmetric price adjustment. We believe that some earlier studies found asymmetric adjustments because they did not use narrowly defined products, control for all the main factor prices, and use state-of-the-arts estimation procedures.

Consumers choose from among the varieties of two brands and an outside good using order statistics. We analytically derive demand functions conditional on their valuations of the varieties being distributed independently uniform. Demands are functions of higher-order polynomials, where polynomial order is increasing in variety. Curvatures (derivatives) of the demands are themselves demands (over lower numbers of varieties). Based on this theory, we estimate a three-parameter empirical version of the model for the retail soft-drink market. These estimates are used to determine the effects cost shocks on optimal prices a nd varieties of Coke and Pepsi for a grocery store. We provide estimates on how much an increase in variety affects welfare and determine the optimal number of varieties. Because the demand curves have convex and concave sections around an inflection point, firms are more likely to respond and make large price adjustments to increases in cost than to comparable decreases in costs.

Specific Objectives of the Project

The objective of the research is to simulate how the greenhouse gas (GHG) cap-and-trade program will affect the dairy industry in California, including both dairy farms and dairy product manufacturers. The simulation results will demonstrate the changes in carbon emissions, production and product portfolio, profits, and competitiveness. We will develop theoretical models to capture both the horizontal competition between California's dairy products and the products manufactured by other states that will not adopt climate policy any time soon and the vertical relationship between California's dairy product manufacturers and dairy farms. To calibrate the economic impacts, we will estimate the carbon intensities of the dairy producers in California and the rest of the country, and the demand elasticities of dairy products.

Summary of Results

The simulation analysis of the effects of the GHG cap-and-trade program indicates that carbon pricing leads to (a) higher prices of dairy products and lower energy use, and (b) lower prices of milk when the output-market equilibrium effect dominates the factor substitution effect, and vice versa. The magnitudes of the changes in the equilibrium prices and quantities depend primarily on the elasticity of milk supply, the own-price elasticity of demand for manufactured dairy products, and the elasticity of substitution between milk and energy in the production of manufactured dairy products. Results imply a generally small influence of dairy policies. The existence of dairy policies lowers the potential welfare gains for consumers of fluid dairy products from carbon pricing.

This research focused on three water pricing policies introduced by the city of Davis between 1996 and 2006: a switch from a uniform to an increasing block pricing structure; the introduction of a second block for single family residential households; and a change in the sewer rate structure. Our results indicate that each policy led to water conservation and suggest that a doubling of prices would on average reduce consumption by 12%.

During the period from 1993 to 2006 over half of Mexico's arable land was formally titled to more than 3 million households in the land reform sector. In this research, we assess whether this change in property rights is affecting the migration of farm labor to the United States. We take advantage of the rollout of the land certification program to identify the impact of gaining land ownership over the household's migration behavior. We find that the probability of having a migrant living and working outside the household increases on average by 28% when the household has been reached by the program. If migration of Mexican farm labor toward the United States is a concern, the land titling program offers a unique opportunity to use greater security of property rights and incentives to invest to promote the adoption of labor intensive high value crops among recent land owners.

The paper examines the effects of critical habitat (CH) designation on the value of vacant land. The regulation is designed to generate benefits by protecting habitat for endangered and threatened species under the ESA. Critical habitat is a controversial provision of the act, as property owners argue that it can result in large, negative economic impacts. In this paper we provide the first estimates of the impacts of CH designation on vacant land values, based on observed market transactions in two counties. We show that designation results in a statistically significant decrease in land value. Further, the market impact of critical habitat designation is shown to depend on local land use regulation. Parcels inside the urban growth boundary (UGB) designated as critical habitat lose in excess of 56% of their value. We also find that designated parcels outside the UGB experience a more moderate increase in value, perhaps because their value as mitigation land increases with designation as critical habitat.

Conservation organizations seeking to reduce over-fishing and promote better fishing practices have increasingly turned to market-based mechanisms such as environmental sustainability labels (eco-labels) in order to shift patterns of household consumption. The real-world evidence-increasing per capita seafood consumption and continued decline in the size of some of the very fisheries that have been certified–suggests that these mechanisms may be falling catastrophically short of their objectives. This Giannini-funded project explores this apparent paradox with an empirical analysis of consumer response to an advisory for sustainable sea food adopted by a supermarket in the United States. The advisory consisted of a label in which one of the three "traffic light" colors was placed on the pin tag of every fresh seafood product to inform consumers about the relative environmental sustainabil ity of that product. Analogous to the food labeling system currently being proposed in the European Union, green meant "best" choice, yellow meant "proceed with caution", and red meant "worst choice." Using a unique product-level panel scanner data set of weekly sales data, we apply a difference-in-differences identification strategy to estimate the effect of the advisory on seafood sales. We find some evidence that the advisory led to a slight decline in overall seafood sales (significant -15.5%). We find strong evidence that the sale of yellow-labeled seafood significantly decreased (-31.3 to -34.9%, significantly). We fail to reject the null hypothesis of no change for green and red sales. Furthermore, yellow products on a mercury safe list had the largest drop in sales (-41.3%). These results suggest that we need a much better understanding of whether and when eco-labels achieve their goals before continuing to make large investments in household consumers as a primary conservation tool. Co-author: Dr. Eric Hallstein. The paper is under revision at the Journal of Environmental Economics and Management, second round.

The financial crisis originated from a large volume of defaults of real-estate owners. These defaults devastated the financial institutions that owned the mortgages or provided insurance against defaults. But what caused these defaults? While there is a consensus that low interest rates and easy credit fueled the crisis, we argue that the high energy prices ignited it. Using data from California, we show that individuals in communities located farther from employment centers have much higher rates of defaults than those closer to centers and, on average, have low incomes. Thus, the doubling of energy prices during 2005-2008 caused many individuals in commuting com munities to default on mortgages as the housing-price bubble burst and they hit their budgetary constraints.

Specific Objectives of the Project

The objective is to estimate the demand for categories of goods, including agricultural goods and energy goods, by California consumers.

Project Report/Summary of Results

A methodology that accounts for the time series nature of demand estimates was derived, although attempts within that methodology to account for second order bias were not successful. Demand systems were estimated from CEX data, using each individual in the data as a separate set of observations. The systems do account for the fixed effects of these individuals and the fixed effects do make a significant difference in the estimates.

In a number of markets, transportation costs shape consumer behavior, leading firms to choose price and quality based on the decisions of nearby competitors. The theoretical literature on this kind of differentiation has shown that nearly any outcome can be generated by a model built upon reasonable assumptions (see Fisher, 1991 and Sutton, 1990), yet, simultaneity in firm choices makes it empirically difficult to estimate the effect of distance on firm choices. Using exogenous variation provided by the 1998 introduction of hygiene grade cards for restaurants in Los Angeles County, I investigate how the extent of product differentiation affects quality provision when only a portion of the market is regulated. I find evidence that unregulated firms improve hygiene more when they are located near regulated competitors.

What effect do rising levels of unemployment have on grocery purchasing patterns? More specifically, how does the level of unemployment in a neighborhood affect the probability of households buying certain products at the grocery store? In order to address this question, a large data set combining retail scanner data, demographic and unemployment data was analyzed. Preliminary reduced form results indicate there exists an economically and statistically relationship between neighborhood unemployment and changes in the pattern of grocery purchases (both within and between grocery category). For example, quantities sold of nearly all packaged meat have a positive relationship with unemployment (the largest coefficient is estimated on the "Franks" packaged meat sub-category) and both cold and hot cereal sales increase with unemployment. These results are suggestive, however, a more complete analysis is forthcoming. Next steps include further economic modeling and the application of the multivariate logit approach to incomplete demand systems.