First filter test of market power in Finnish food retailing sector

Buyer power and competition policy in food supply chains has emerged as an important economic issue and a highly sensitive item on the policy agenda all around the world. Claims that large retailers and food companies are depressing farm prices because of their market power have been made in many countries around the world (Swinnen and Vandeplas, 2009). Arising concentration of retailer sector increases the concern of existence and gradual growth of buyer power in this sector. The key reason is that the growing buyer power may have the effect of considerably distorting both retail and producer competition, and eventually it may damage economic welfare. In Finland, the increased concentration of the retail sector, with fewer outlets and the growth of the large supermarket chains, has been particularly fast. The two leading Finnish retail chains of food and daily goods increased their market share from 55 per cent in 1990 to nearly 75 per cent in 2008 (Niemi and Ahlstedt 2009).. The purpose of this paper is to investigate the possible existence of buyer power in Finnish food retail food industry. In details, we follow an approach used by Lloyd et al (2009) to measures oligopoly and oligopsony market power in the Finnish food retail industry. This offers a ‘first-filter’ test of price data that may be used as part of the preliminary analyses into the presence of buyer power in food markets. In practice, we apply a vector error correction mechanism (VECM) to perform two-stage tests: First is to test the hypothesis of cointegration between the supply and demand price indices with expected signs for the coefficients irrespective of the degree of retail competition; second is to test the null hypothesis of the perfect competition. The model also serves as a useful device for characterising how prices are transmitted in food market, albeit in simplified form.