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Competition Effects of Supermarket Services

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  • Alessandro Bonanno
  • Rigoberto A. Lopez

Abstract

This article investigates the competition effects of supermarket services using fluid milk as a case study. A simultaneous equation model for services and price competition is estimated with scanner data from fifteen supermarket chains using two alternative measures of services, namely store size and principal components of in-store services. Empirical results show that increasing services results in economies of scope, greater supermarket chain-level demand, lower price elasticity of demand, and enhanced market power, leading to higher milk prices and quantity sold. We conclude that, as result of service competition, supermarkets differentiate themselves from competitors and successfully attract less price-sensitive consumers. Copyright 2007, Oxford University Press.

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File URL: http://hdl.handle.net/10.1111/j.1467-8276.2009.01255.x
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Bibliographic Info

Article provided by Agricultural and Applied Economics Association in its journal American Journal of Agricultural Economics.

Volume (Year): 91 (2007)
Issue (Month): 3 ()
Pages: 555-568

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Handle: RePEc:oup:ajagec:v:91:y:2007:i:3:p:555-568

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References

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  1. John Barron & Beck Taylor & John Umbeck, 2001. "New evidence on price discrimination and retail configuration," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 135-139.
  2. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 30-53, February.
  3. Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2004. "Retail Oligopoly Power, Dairy Compact, And Boston Milk Prices," Food Marketing Policy Center Research Reports 083, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  4. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  5. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-76, Fall.
  6. Rajiv Lal & Ram Rao, 1997. "Supermarket Competition: The Case of Every Day Low Pricing," Marketing Science, INFORMS, vol. 16(1), pages 60-80.
  7. Ellickson, Paul B., 2006. "Quality competition in retailing: A structural analysis," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 521-540, May.
  8. Rigoberto Lopez & Azzeddine Azzam & Carmen Lirón-España, 2002. "Market Power and/or Efficiency: A Structural Approach," Review of Industrial Organization, Springer, vol. 20(2), pages 115-126, March.
  9. Roger Betancourt & David Gautschi, 1990. "Demand Complementarities, Household Production, and Retail Assortments," Marketing Science, INFORMS, vol. 9(2), pages 146-161.
  10. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
  11. Howard Smith, 2004. "Supermarket Choice and Supermarket Competition in Market Equilibrium," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 235-263.
  12. Betancourt, Roger R & Gautschi, David A, 1993. "The Outputs of Retail Activities: Concepts, Measurement and Evidence from U.S. Census Data," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 294-301, May.
  13. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
  14. Ronald W. Cotterill & Tirtha Pratim Dhar, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Food Marketing Policy Center Research Reports 074, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  15. Jean Kinsey & Ben Senauer, 1996. "Consumer Trends and Changing Food Retailing Formats," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(5), pages 1187-1191.
  16. Howard Smith, 2004. "Supermarket Choice and Supermarket Competition in Market�Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 235-263, 01.
  17. Timothy J. Richards & Stephen F. Hamilton, 2006. "Rivalry in Price and Variety among Supermarket Retailers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(3), pages 710-726.
  18. Cotterill, Ronald W. & Dhar, Tirtha Pratim, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Research Reports 25189, University of Connecticut, Food Marketing Policy Center.
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Citations

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Cited by:
  1. Davis, David E., 2009. "Price and promotion effects of supermarket mergers," SDSU Working Papers in Progress 12009, South Dakota State University, Department of Economics, revised Jun 2010.
  2. Stephen Martin, 2012. "Market Structure and Market Performance," Review of Industrial Organization, Springer, vol. 40(2), pages 87-108, March.
  3. Bonanno, Alessandro & Ghosh, Gaurav S., 2010. "SNAP Efficacy and Food Access – A Nationwide Spatial Analysis," 115th Joint EAAE/AAEA Seminar, September 15-17, 2010, Freising-Weihenstephan, Germany 116437, European Association of Agricultural Economists.
  4. Bonanno, Alessandro & Chenarides, Lauren & Goetz, Stephan J., 2012. "Limited Food Access as an Equilibrium Outcome: An Empirical Analysis," 2012 AAEA/EAAE Food Environment Symposium, May 30-31, Boston, MA 123196, Agricultural and Applied Economics Association.
  5. Widenhorn, Andreas & Salhofer, Klaus, 2012. "Price sensitivity within and across retail formats," Congress Papers 124108, Italian Association of Agricultural and Applied Economics (AIEAA).

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