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Intra- and Interformat Competition Among Discounters and Supermarkets

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Author Info

  • Kathleen Cleeren

    ()
    (Maastricht University, 6200 MD Maastricht, The Netherlands)

  • Frank Verboven

    ()
    (Catholic University Leuven, 3000 Leuven, Belgium)

  • Marnik G. Dekimpe

    ()
    (Tilburg University, 5000 LE Tilburg, The Netherlands, and Catholic University Leuven, 3000 Leuven, Belgium)

  • Katrijn Gielens

    ()
    (University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

Abstract

The price-aggressive discount format, popularized by chains such as Aldi and Lidl, is very successful in most Western economies. Its success is a major source of concern for traditional supermarkets. Discounters not only have a direct effect on supermarkets' market shares, but they also exert considerable pressure to improve operational efficiency and/or to decrease prices. We use an empirical entry model to study the degree of intra- and interformat competition between discounters and supermarkets. Information on the competitive impact of new entrants is derived from the observed entry decisions of supermarkets and discounters in a large cross section of local markets, after controlling for a number of local market characteristics. In our modeling framework, we endogenize the number of retailers and allow for asymmetric intra- and interformat competitive effects in a flexible way. We apply our modeling approach to the German grocery industry, where the discount format has stabilized after two decades of continued growth. We find evidence of intense competition within both the supermarket and discounter format, although competition between supermarkets is found to be more severe. Most importantly, discounters only start to affect the profitability of conventional supermarkets from the third entrant onwards. This may explain why many retailers rush to add a discount chain to their portfolio: early entrants may benefit from the growth of the discount-prone segment without cannibalizing the profits of their more conventional supermarket stores.

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File URL: http://dx.doi.org/10.1287/mksc.1090.0529
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 29 (2010)
Issue (Month): 3 (05-06)
Pages: 456-473

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Handle: RePEc:inm:ormksc:v:29:y:2010:i:3:p:456-473

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Keywords: empirical entry model; hard discounters; interformat competition; grocery industry;

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References

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Citations

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Cited by:
  1. Widenhorn, Andreas & Salhofer, Klaus, 2012. "Price sensitivity within and across retail formats," Congress Papers 124108, Italian Association of Agricultural and Applied Economics (AIEAA).
  2. Loy, Jens-Peter & Holm, Thore & Steinhagen, Carsten, 2012. "Vertical Price Transmission In Differentiated Product Markets: A Disaggregated Study For Milk And Butter," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 123284, Agricultural and Applied Economics Association.
  3. Antonis Michis & Anna Markidou, 2013. "Determinants of retail wine prices: evidence from Cyprus," Empirical Economics, Springer, vol. 45(1), pages 267-280, August.
  4. Hoffman, Angela & Senkler, Heike, 2011. "Interformat price competition of multi-product retailers: Evidence for German grocery retailing," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114533, European Association of Agricultural Economists.
  5. Rey, Patrick & Chen, Zhijun, 2010. "Loss Leading as an Exploitative Practice," IDEI Working Papers 658, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2011.
  6. Olivier Coibion & Yuriy Gorodnichenko & Gee Hee Hong, 2012. "The Cyclicality of Sales, Regular and Effective Prices: Business Cycle and Policy Implications," NBER Working Papers 18273, National Bureau of Economic Research, Inc.
  7. Gayle, Philip & Luo, Zijun, 2012. "Choosing between Order-of-Entry Assumptions in Empirical Entry Models: Evidence from Competition between Burger King and McDonald’s Restaurant Outlets," MPRA Paper 51259, University Library of Munich, Germany, revised Sep 2013.
  8. Holm, Thore & Loy, Jens-Peter & Steinhagen, Carsten, 2012. "Bio Auch Bei Der Preissetzung: Konsummilch In Deutschland," 52nd Annual Conference, Stuttgart, Germany, September 26-28, 2012 137159, German Association of Agricultural Economists (GEWISOLA).

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