Supermarket Choice and Supermarket Competition in Market Equilibrium

Abstract

Multi-store firms are common in the retailing industry. Theory suggests that cross-elasticities between stores of the same firm enhance market power. To evaluate the importance of this effect in the U.K. supermarket industry, we estimate a model of consumer choice and expenditure using three data sources: profit margins for each chain, a survey of consumer choices and a data-set of store characteristics. To permit plausible substitution patterns, the utility model interacts consumer and store characteristics. We measure market power by calculating the effect of merger and demerger on Nash equilibrium prices. Demerger reduces the prices of the largest firms by between 2 and 3·8% depending on local concentration; mergers between the largest firms lead to price increases up to 7·4%.

Multi-Category Competition and Market Power: A Model of Supermarket Pricing

“…The UK's Expenditure and Food Survey (EFS) includes a variable for gross current household income (variable p352). We estimate household income by regressing this income variable (for years [2003][2004][2005]) on other demographic variables in the ESF that map to those in the TNS survey, namely indicator variables for the number of cars (0, 1, 2, ≥ 3), adults (1, 2, ≥ 3) children (0, 1, 2, ≥ 3), household size (1, 2, ..., ≥ 6), geographic region in Great Britain (10 regions), social class (6 classes as described in Appendix C), tenure of residence (dummies for whether the home is privately owned, privately rented, or public housing, structure of residence (detached house, semi-detached/terrace, and apartment), year, sex of the Household Reference Person (HRP), and age of the HRP (≤24, [25][26][27][28][29][30][31][32][33][34][35][36][37][38][39][40][41][42][43][44][45][46][47][48][49][50][51][52][53][54],55-64,≥ 65) We dropped the top and bottom 1% household incomes to avoid outliers. The R 2 is 0.51 and the number of observations in the regression is 17, 335. yielding 180,000 observations.…”

“…Smith (2004) uses a similar approach in a setting with a single continuous choice. Importantly, in our model, the variables that determine shopping choice are not the same as those that determine quantity choice: distance enters shopping costs but is excluded from variable utility.…”

“…We develop a model that is multiple-discrete-continuous, in that the consumer can choose one or more (discrete) stores and makes a (continuous) non-negative choice of quantity for every category. We build on the existing literature on multiple-discrete choice (see Hendel (1999), Dubé (2005), Gentzkow (2007)), and discrete-continuous choice (see Dubin and McFadden (1984), Haneman (1984), Smith (2004)). 8 Our multi-category multi-store model brings together the empirical literature that measures market power for a single supermarket category (e.g.…”

“…Nevo (2001) and Villas Boas (2007)), with the literature on spatial competition between retail outlets in which the choice of category is not modelled (e.g. Smith (2004), Davis (2005) and Houde (2012)). The paper also relates to an established literature in quantitative marketing studying store choice (e.g.…”

Inference of Consumer Consideration Sets

“…Arnold, Oum and Tigert, 1983;Smith, 2004;Briesch, Chintagunta and Fox, 2009). In contrast, the literature finds that other household characteristics like household income or household size do not significantly affect store choice (Leszczyc, Sinha and Timmermans, 2000;Cleeren et al, 2010).…”