Value Extraction by Bargaining over Wholesale Price

A new paper by Alvarez-Blaser et al analyzes how wholesale and retail prices respond to changes in costs for 2,000 household products from a global manufacturer. There are lots of interesting results on pricing dynamics, responses to idiosyncratic versus aggregate cost shocks, cost pass-through rates, and more. The result I was drawn to was how the value that is created is allocated between the manufacturer and retailers. The retailer markup is the retail price minus the wholesale price while manufacturer markup is the wholesale price minus cost. 

Rather than passing on changes in the wholesale price, the above graph from the paper indicates that retailers respond with lower markups on their end. The two parties determine how much value they can each extract by bargaining over the wholesale price. This suggests that the final price to consumers is a hard limit on the value to be extracted.