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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.
... 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. ...
We study a heretofore unexamined type of product differentiation, horizontally differentiated products with differential costs, and apply the analysis to retail pricing of fluid milk products. The theoretical models yield unique predictions for the relationship among prices of the four horizontally differentiated fluid milk products (skim, 1%, 2%, and whole milk) and the impacts of butterfat and nonfat milk costs on prices, depending upon the form of retail competition. An empirical analysis of retail milk pricing for four major cities in California enables tests to be conducted of which form of behavior best characterizes grocery retailing in these cities.
... Fresh produce commodities provide some of the better opportunities to examine retailer buying power because farm prices are typically reported publicly, as are shipping 3 Cotterill (1993) contains a debate on the issue of oligopoly power in grocery retailing, and Connor (1999) and Wright (2001) provide relatively recent critiques of research into the concentration-price relationship in grocery retailing. 4 Weatherspoon and Reardon (2003) and Reardon et al. (2003) describe retailers' use of centralized procurement systems and spatially dispersed distribution centers that may encompass multiple countries in developing regions. ...
This paper discusses recent developments in the structure of food markets worldwide, including rising consolidation and concentration, increased vertical coordination and control, and emphasis on multifaceted dimensions of product quality. Particular attention is paid to the role of international grocery retail chains in this process. I argue that these structure developments are inconsistent with the tenets of the perfect competition market model and discuss the consequences of misapplying the competitive model in these settings.
... There has been both conspicuous policy concern and economics research debate caused by the rising concentration and consolidation of sales among large supermarket chains in the United States. Two notable questions are: (1) whether retailers have oligopsony power over farmers (Cotterill, 1993;Cotterill and Harper, 1995;Connor, 1999;Cotterill, 1999;Kaufman et al. 2000;MacDonald, 2000;Wright, 2001); and (2) whether farmers experience welfare loss due to the structure changes and the practice of market power in the retail industry (Sexton, Zhang and Chalfant, 2003). The study of market power in the retail industry is difficult because the major market power indicator (the retail markup of a price over its marginal cost) can be affected by many reasons other than market power, especially for multi-product retailers who on average sell 40,000 or more different products in U.S. supermarkets. ...
The typical model of retail pricing for produce products assumes retailers set price equal to the farm price plus a certain markup. However, observations from scanner data indicate a large degree of price dispersion in the grocery retailing market. In addition to markup pricing behavior, we document three alternative leading pricing patterns: fixed (constant) pricing, periodic sale, and high-low pricing. Retail price variations under these alternative pricing regimes in general have little correlation with the farm price. How do retailers' alternative pricing behaviors affect farmers' welfare? Using markup pricing as the baseline case, we parameterize the model to reflect a prototypical fresh produce market and carry out a series of simulations under different pricing regimes. Our study shows that if harvest cost is sufficiently low, retail prices adjusting only partially, or not at all, to supply shocks tends to diminish farm income and exacerbate farm price volatility relative to the baseline case. However, we also find that if harvest cost is sufficiently large and the harvest-cost constraint places a lower bound on the farm price, increased farm price volatility induced by retailers' alternative pricing strategies may result in higher farm income, compared to markup pricing. Furthermore, taking farmers' risk attitude into account, higher income risk under alternative pricing strategies may offset the higher expected income, resulting in lower expected utility to risk-averse farmers. Our study is the first to evaluate the welfare implications for producers of the diversified pricing strategies that retailers utilize in practice and the resulting attenuation of the relationship between prices at retail and at the farm gate.
... 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-conductperformance framework. ...
We study a heretofore unexamined type of product differentiation, horizontally differentiated products with differential costs, and apply the analysis to retail pricing of fluid milk products. The theoretical models yield unique predictions for the relationship among prices of the four horizontally differentiated fluid milk products (skim, 1%, 2%, and whole milk) and the impacts of butterfat and nonfat milk costs on prices, depending upon the form of retail competition. An empirical analysis of retail milk pricing for four major cities in California enables tests to be conducted of which form of behavior best characterizes grocery retailing in these cities.
... One argument is that SBC laws effectively protect gasoline retailers who do not rely on other sources of revenue from larger retailers who sell a broader 11 See Milgrom and Roberts [27] or Kreps and Wilson [24] for analyses in which predatory pricing may be an optimal strategy for a firm. range of products and who can practice price discrimination (Claycombe [13]; Wright [43]). In the absence of SBC laws, these larger and more diverse retailers compete on price (and perhaps use gasoline as a loss leader), driving prices down. ...
In recent years a number of US states have imposed sales-below-cost (SBC) laws directed at motor fuel markets. We use panel data over the 1983–2002 period to evaluate the effects of newly imposed motor fuel SBC laws on retail and wholesale gasoline prices, their mark-up, and the structure of motor fuel markets. A unique feature of our analysis is that we utilize transitions in those states that adopted new SBC legislation to evaluate the effects of the laws. Perhaps surprisingly, we find that gasoline prices are about one cent lower five years after the law is imposed. We also find that total number of gasoline outlets is greater in the presence of the law.
... There has been both conspicuous policy concern and economics research debate caused by the rising concentration and consolidation of sales among large supermarket chains in the United States. Two notable questions are: (1) whether retailers have oligopsony power over farmers (Cotterill, 1993;Cotterill and Harper, 1995;Connor, 1999;Cotterill, 1999;Kaufman et al. 2000;MacDonald, 2000;Wright, 2001); and (2) whether farmers experience welfare loss due to the structure changes and the practice of market power in the retail industry (Sexton, Zhang and Chalfant, 2003). The study of market power in the retail industry is difficult because the major market power indicator (the retail markup of a price over its marginal cost) can be affected by many reasons other than market power, especially for multi-product retailers who on average sell 40,000 or more different products in U.S. supermarkets. ...
The typical model of retail pricing for produce products assumes retailers set price equal to the farm price plus a certain markup. However, observations from scanner data indicate a large degree of price dispersion in the grocery retailing market. In addition to markup pricing behavior, we document three alternative leading pricing patterns: fixed (constant) pricing, periodic sale, and high-low pricing. Retail price variations under these alternative pricing regimes in general have little correlation with the farm price. How do retailers’ alternative pricing behaviors affect farmers’ welfare? Using markup pricing as the baseline case, we parameterize the model to reflect a prototypical fresh produce market and carry out a series of simulations under different pricing regimes. Our study shows that if harvest cost is sufficiently low, retail prices adjusting only partially, or not at all, to supply shocks tends to diminish farm income and exacerbate farm price volatility relative to the baseline case. However, we also find that if harvest cost is sufficiently large and the harvest-cost constraint places a lower bound on the farm price, increased farm price volatility induced by retailers’ alternative pricing strategies may result in higher farm income, compared to markup pricing. Our study is the first to evaluate the welfare implications for producers of the diversified pricing strategies that retailers utilize in practice and the resulting attenuation of the relationship between prices at retail and at the farm gate.
... They found a positive and significant concentration-price correlation for dry groceries, but a negative and insignificant correlation for fresh and chilled food items. Cotterill's (1993) part 5 contains a debate on the issue of market power in grocery retailing, and Connor (1999) and Wright (2001) provide recent critiques of research into the concentration-price relationship in grocery retailing. To the extent that the positive correlation between pricing and concentration found in the majority of studies is a robust conclusion, it lends credence to the aforementioned concerns that the recent wave of grocery mergers is apt to cause adverse price effects on producers and/or consumers. ...
This study examines retailer pricing behavior for iceberg lettuce shipped from California and Arizona, mature-green and vine-ripe tomatoes shipped from California and Florida, and lettuce-based fresh salads. A switching regression model is used to examine oligopsony power. Market power over consumers is inferred from selling price, selling and acquisition cost, and estimated price elasticities of demand. Evidence suggests buyers are often able to exercise oligopsony power in procuring fresh produce commodities. Unilateral monopoly power granted by geographic and brand differentiation allows retailers to exercise market power over consumers, in the sense of marking up prices in excess of full marginal costs.
... They found a positive and significant concentration-price correlation for dry groceries, but a negative and insignificant correlation for fresh and chilled food items. Cotterill's (1993) part 5 contains a debate on the issue of market power in grocery retailing, and Connor (1999) and Wright (2001) provide recent critiques of research into the concentration-price relationship in grocery retailing. To the extent that the positive correlation between pricing and concentration found in the majority of studies is a robust conclusion, it lends credence to the aforementioned concerns that the recent wave of grocery mergers is apt to cause adverse price effects on producers and/or consumers. ...
This study examines supermarket retailer behavior in the procurement of iceberg lettuce from California and Arizona, vine-ripe and mature-green tomatoes from California, and mature-green tomatoes from Florida. The analysis relies upon both a reduced-form specification of farm-retail price spreads and a structural model of procurement for a perishable commodity with inelastic supply. The evidence supports a conclusion that buyers have been able to exercise oligopsony power in procuring iceberg lettuce from grower-shippers in California and Arizona. The evidence regarding buyer market power is more mixed for fresh tomatoes. The apparent success of the Florida mature-green tomato industry in enforcing a price floor and capturing a significant share of the surplus in excess of the price floor demonstrates the potential benefits to producers from coordinated behavior.
... 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. ...
Rising concentration and consolidation of sales among large supermarket chains in the U.S. and other countries, due in part to a recent wave of mergers in food retailing, have made retailers' role in the food industry a topical issue. Using a unique micro dataset, this paper investigates retailer pricing issues for avocados, a key California specialty commodity, and analyzes the implications of retailer pricing behavior for the effectiveness of avocado industry advertising programs. The methodologies developed and the results achieved in this study should have broad applications across the produce sector, the food industry, and the grocery retail market. We find that retail prices for avocados are highly dispersed both spatially and temporarily. The analysis also illustrates the existence of a "regular" retail price for avocados. Downward deviations from the "regular" price dominated changes in retail prices, in particular, temporary price reductions accounted for 27 percent of retail price variations. The study examines the effects of fundamental cost and demand factors on determination of retail prices. We conclude that costs are not a primary factor in setting retail prices for avocados. Retailers' sales strategies, which reflect decreases in retail margins rather than decreases in costs, explained much of the observed temporary price reductions for avocados. Retail prices for avocados also exhibited countercyclical movements over seasonal demand cycles. The findings provide support for Lal and Matutes' (1994) hypothesis that retailers reduce prices or margins during a product's high-demand periods. We investigate how retailers respond to industry promotions and, in turn, how retailer response enhances or vitiates the effectiveness of industry promotions. The approach of "Difference-in-Difference" is employed to evaluate the effects of the California Avocado Commission's (CAC) promotion programs on retail pricing and sales. The analysis demonstrates that the radio campaign and outdoor advertisements were successful in raising avocado sales. There is no evidence that retailers charged higher prices during the CAC's promotions. Nonetheless, the CAC's promotion programs could be enhanced if retailers were better informed about the advertising campaigns. Other noteworthy results include the fact that retail margins increased significantly as shipment volumes increased, indicating the presence of retailer oligopsony power. Also notable was the rather strong evidence that retail prices were significantly lower as a function of the amount of avocados imported from Chile and Mexico, meaning that consumers have benefited from trade liberalization for avocados.
Slotting contracts involve manufacturer payments to retailers for shelf space. Slotting contracts are an important part of the competitive process in many product markets. While slotting contracts have been the subject of congressional hearings, agency investigations, antitrust litigation, and scholarly debate, very little is known about their competitive consequences. This article analyzes military commissary sales before and after a natural experiment in which commissaries ceased to accept slotting payments. This natural experiment provides a rare opportunity to directly observe the crucial policy counterfactual: would a prohibition on slotting contracts increase consumer welfare? This analysis measures the impact of slotting, at both the product and category levels, on prices, output, and product variety. The results are inconsistent with anticompetitive theories of slotting contracts. Slotting contracts are primarily associated with brand-shifting of sales within a product category, but not increases in category level prices or a reduction in category output or variety. To the extent that slotting contract revenue is passed on to consumers in competitive retail markets, an assumption generally warranted in the grocery retail industry, the results imply that slotting contract competition is likely to benefit consumers.
Frank Easterbrook's seminal analysis of error-cost minimization in The Limits of Antitrust has special relevance to antitrust intervention in markets where innovation is a critical dimension of competition. Both product and business innovations involve novel practices. Historically, the economics profession has tended initially to rely upon monopoly explanations for such practices. Courts have reacted with similar hostility. But almost always there has followed a more nuanced economic understanding of the business practice that recognized its procompetitive virtues. Antitrust standards have adjusted occasionally to reflect that new economic learning. This sequence has produced a fundamental link between innovation and antitrust error that transcends the uncontroversial point that the probability of false positives and their social costs are both higher in the case of innovation and innovative business practices. We discuss some principles for applying Easterbrook's error-cost framework to innovation. We then discuss the historical relationship between antitrust error and innovation. We conclude by challenging the conventional wisdom that the errorcost approach implies that the rule of reason, rather than per se rules, should apply to most forms of business conduct. We instead identify simple filters to harness existing economic knowledge to design simple rules that minimize error costs. We make five such proposals. © The Author (2010). Published by Oxford University Press. All rights reserved.
Slotting fees, per-unit-time payments made by manufacturers to retailers for shelf space, have become increasingly prevalent in grocery retailing. Shelf space contracts are shown to be a consequence of the normal competitive process when retailer shelf space is promotional, in the sense that the shelf space induces profitable incremental individual manufacturer sales without drawing customers from competing stores. In these circumstances, retailer and manufacturer incentives do not coincide with regard to the provision of promotional shelf space, and manufacturers must enter shelf space contracts with retailers. Retailers are compensated for supplying promotional shelf space at least partially with a per-unit-time slotting fee when interretailer price competition on the particular product makes compensation with a lower wholesale price a more costly way to generate equilibrium retailer shelf space rents. Our theory implies that slotting will be positively related to manufacturer incremental profit margins, a fact that explains both the growth and the incidence across products of slotting contracts in grocery retailing.
This paper examines grocery retailers’ ability to influence prices charged to consumers and paid to suppliers. We discuss how retailer market power manifests itself in terms of pricing and marketing strategies by setting forth and offering evidence in support of eight “stylized facts” of retailer pricing and brand decisions. We argue that little, if any, of this behavior can be explained by a model of a competitive, price-taking retailer, but that most of the indicated behavior was also inconsistent with traditional models of market power. Finally, we discuss the impacts of aspects of this retailer behavior on the upstream farm sector.
Previous studies in organizational economics and international business research have not tested a property rights view on the allocation of decision rights (DR) in joint ventures (JVs). The paper offers a test of the property rights explanation by using data from Hungarian JVs. Our analysis derives the following hypothesis: The more important the JV partner's intangible knowledge assets for the generation of residual surplus, the more residual DR are assigned to him. Copyright � 2009 John Wiley & Sons, Ltd.
The Netherlands introduced a new health insurance system in January 2006, a system based on managed competition. Such a system critically hinges on consumers that search. It is for this reason we think it is important to investigate the extend to which consumers search, how they search and why they search ´or don’t search. The price dispersion observed in the insurance market after the reform suggests the number of consumers that searches is low. We set up a search model for insurance that includes the main features of the Dutch health insurance market after the reform and test the hypotheses from this model on the data.
Current economic doctrine offers to its students a basic relationship between the number of firms that produce for a given market and the degree to which competitive results will prevail. Stated explicitly or suggested implicitly is the doctrine that price and output can be expected to diverge to a greater extent from their competitive levels the fewer the firms that produce the product for the market. This relationship has provided the logic that motivates much of the research devoted to studying industrial concentration, and it has given considerable support to utility regulation.2
No one has the right, and few the ability, to lure economists into reading another article on oligopoly theory without some advance indication of its alleged contribution The present paper accepts the hypothesis that oligopolists wish to collude to maximize joint profits It seeks to reconcile this wish with facts, such as that collusion is impossible for many firms and collusion is much more effective in some circumstances than in others The reconciliation is found in the problem of policing a collusive agreement, which proves to be a problem in the theory of information A considerable number of implications of the theory are discussed, and a modest amount of empirical evidence is presented
It is frequently asserted that labor organizations have dominated the collective bargaining process in some industries, extracting
higher wages than in the absence of unionism. One reason may be that oligopoly exists in the relevant product markets, so
that firms obtain greater-than-normal returns regardless of the outcome of wage negotiation. Also, work stoppages may negatively
affect market share, causing firms to be reluctant to resist labor demands. Under these circumstances, union share and product
market concentration would be expected to be positively related to product price. This proposition is tested explicitly for
the food retailing industry and confirmed.
Using a new data set and including income in the specification, this paper finds that retail grocery prices are not significantly related to market concentration.
The profits of leading firms in concentrated markets may be due to market share related cost efficiencies or market power. One way to identify the separate effect or market power is to analyze the relationship of market concentration and market share to the prices charged by firms in local geographic markets. This study analyzes the prices charged by supermarkets in local Vermont markets. Prices are significantly higher in more concentrated markets. The Herfindahl index, as a concentration measure, out-performs the four-firm or one-firm concentration ratio. Herfindahl marginally out-performs a firm's market share as a predictor of its price level.
The common use of the profits-sales ratio as a measure of the Lerner index of monopoly power is flawed, even with the assumption of constant returns, because of problems connected with the valuation of capital. The size of the error is related to the cost of capital, the growth rate of the firm, the depreciation method used, and, most important, the shape of the stream of benefits resulting from an investment. Examples show that the error can be quite large; further, the error is likely to be systematically related to the variables used in regression studies.
Movements in total quantity and in quality-adjusted price suggest a supply-side shock in the American automobile market in 1955. This paper tests the hypothesis that the shock was a transitory change in industry conduct, a price war. The key ingredients of the test are alternative equilibrium models of oligopoly under product differentiation. In nonnested (Cox) tests of hypotheses, a collusive solution is sustained in 1954 and in 1956, while a competitive solution holds in 1955. The result does not appear to be an artifact, since it is robust in tests against alternative specifications. Copyright 1987 by Blackwell Publishing Ltd.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
This paper incorporates the notion of rivalry into current oligopoly models. Particular attention is placed on the specification of the firm interaction parameter. The empirical work demonstrates that rivalry is an important phenomenon in US manufacturing industries. Specifically, the findings suggest that a larger market share raises a firm's own margin. A larger leader lowers follower margins in high-scale industries, but has little effect where scale economies are not important. In addition, larger second-ranked firms can significantly lower leaders' margins.
A MAJOR concern of the body of economic analysis surrounding the theory of the firm is whether the pricing behavior of oligopolistic industries differs from that of competitive industries. Theory suggests that where small groups of sellers account for a substantial proportion of an industry's output, the recognition of mutual interdependence will result in the absence of price competition. Furthermore, the prices and profits are expected to be above the level that would obtain under competitive conditions. Empirical investigations of the relationship between seller concentration and profitability have produced results generally in accord with the theory. However, neither theory nor the empirical evidence provides a clear insight into the specific nature of the concentration-profitability association. The unanswered question is whether or not there is a 'threshold' level of concentration which separates groups of industries earning significantly different profit rates. The purpose of this study is to examine empirically whether a dichotomous functional form of the concentration-profitability association presents a better explanation of the underlying relationship than the continuous linear form: and, if it does, how concentration and profitability are related within the separated groups. The results suggest that there is a critical value for concentration and that there is no significant association between concentration and profit rates within high and low concentration groups.