Vertical relations, pass-through, and market definition: Evidence from grocery retailing

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While pass-through rates are widely discussed in cartel damage claims, we show that pass-through rates can also have significant effects in market definition exercises if industries are vertically structured. In general, higher pass-through rates lead to larger upstream market definitions according to the SSNIP test.Taking the example of grocery retailing, upstream markets (at the manufacturer level) can easily be defined too widely if the assumed pass-through rates are too high and vice versa. We illustrate our theoretical considerations with a detailed empirical analysis of German retailing markets (see Figure 3 for a graphic summary).