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Von's grocery and the concentration-price relationship in grocery retail

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Abstract

Antitrust scholars and industrial organization economists have long been interested in analyzing the competitive effects of mergers between competitors. Much of the attention devoted to this subject has focused on the correlation between the concentration in a market and its prices. The traditional analysis suggests that higher levels, of concentration lead to higher prices as a single firm gains market power or as leading firms are able to engage in stable, tacitly collusive agreements because of the smaller number of firms. In grocery retail, for example, a myriad of studies comparing the concentration levels in different cities and the prices in those cities have found strong positive relationships between market concentration and price. Findings such as these have justified an active antimerger policy in grocery retail, exemplified in Los Angeles recently by the order that Albertson's divest 145 stores as a condition of its merger with American Stores. The prevalent antimerger policy in Los Angeles has its roots in the 1966 United States v. Von's Grocery Co. decision, which prohibited the merger of two grocery chains that would control less than 9 percent of a post-merger market characterized by remarkably low concentration levels. This Comment shows that the empirical studies in the grocery retailing industry, which find a positive relationship between concentration and price, are not a reliable basis for policymaking decisions by administrative agencies and the courts. It further illustrates that the reasoning behind the Von's Grocery decision is not only flawed and incorrect, but is also damaging to current merger doctrine that has developed into an otherwise coherent framework for analyzing the competitive effects of horizontal mergers. Time series analysis of concentration and price levels in the Los Angeles market indicates that the relationship between concentration and price, up to current levels of market concentration, has been negative, not positive as indicated by previous cross-sectional research. Elimination of decisions such as Von's Grocery from current merger doctrine will prove beneficial for judges, and more importantly, for consumers. Finally, this Comment argues that including reliable empirical studies of the relationship between concentration and price across different industries of antitrust concern can complement the in-depth analysis that the Merger Guidelines lay out for the U.S. Department of Justice and the Federal Trade Commission antitrust officials. Doing so would allow for a more subtle and complete understanding of how concentration levels have affected prices in the past and how likely they are to do so in the future.

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... Ellickson (2007) calls grocery retailing a natural oligopoly because of the industry's ability to innovate continuously, most recently through the adoption of technology-intensive distribution systems in the 1980s and 1990s. 10 Summaries of prior empirical work on food retailers' pricing behavior are provided by Cotterill (1993), Connor (1999), Wright (2001), Digal and Ahmadi-Esfahani (2002), and Sexton, Zhang, and Chalfant (2003). Much of this work has been conducted in the structure- conduct-performance framework. ...
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... See Cooper (2003) and Dobson, Waterson, and Davies (2003) for summaries of concentration issues in European food retailing. 2 For discussions of the multiproduct nature of grocery shopping and retailing, see Bliss (1988), Giulietti and Waterson (1997), Lal and Matutes (1994), and Reiffen (2001, 2004b); for discussions of food retailing from a spatial economics perspective, see Benson and Faminow (1985), Faminow and), Walden (1990), and Azzam (1999; for discussions of imperfect information in retail markets, see Salop (1976 Salop ( , 1977), Stiglitz (1977, 1982), Varian (1980), Sobel (1984, Lal and Matutes (1994), Reiffen (2001, 2004b), and Pesendorfer (2002); for discussions of differentiation of pricing and marketing strategies among retailers, see Stiglitz (1982), Varian (1980), Lal and Rao (1997), Boatwright, Dhar, and Rossi (2004), Pesendorfer (2002), and Sexton, Zhang, and Chalfant (2003; for discussions of concentration and retailer market power, see Cotterill's (1993) part 5 for a debate on the issue of market power in grocery retailing, and Connor (1999) and Wright (2001) for recent critiques of research into the concentration-price relationship in grocery retailing. ...
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