Causal-Discovery-Manufacturer-Retailer-Price-Channels

Overview

Identifying the strategy employed by business firms has motivated empirical research towards studying a firm’s behavior. If there exists a specific pattern that can describe the interactions between the manufacturers and retailers, the application of causality analysis on their pricing interaction can clarify their strategic behavior.

The interactions between the manufacturer and retailer can be discussed to follow a vertical-integrated system or Stackelberg leadership bilateral-monopoly model. In a vertical-integrated system, the manufacturer and retailer cooperate to maximize the profit of the distribution channel instead of individual profit. The important character of this model is that both the manufacturer and retailer affect the sales of the product.

In the Stackelberg leadership modeling, the Stackelberg leader anticipates the response of his opponents with respect to his strategy while his followers do not know how their behavior affect the leader’s strategic choice. Thus, the Stackelberg leader enjoys a major share of the profit and has a stronger pricing power than the follower. To illustrate this, a Retailer Stackelbeg leader can manipulate the manufacturer’s price and in case of Manufacturer Stackelberg leader, the manufacturer can manipulate the retailer’s price to maximize his profit.

Goal:

The goal of this project is to observe whether the system comprising of the manufacturer’s price, retailer’s price and quantity of soft drinks sold, follows a vertical-integrated system or a Stackelberg leader model. This project will give insight into studying strategic interaction between firms using causal discovery methods.

Dataset:

You will be given a time series data set containing three variables namely QTY, RPRICE, and MPRICE. The data was collected on a weekly basis at the Dominick’s Finer Foods supermarket in the Chicago area and made available by the University of Chicago’s Kilts Center.