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Competition Effects of Supermarket Services

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  • Alessandro Bonanno

    ()
    (University of Connecticut)

  • Rigoberto A. Lopez

    ()
    (University of Connecticut)

Abstract

This article investigates the competition effects of supermarket food and non-food services using fluid milk as a case study. A simultaneous equation model for services and price competition is estimated with scanner data from 16 supermarket chains operating in six U.S. cities. Empirical results show that a greater scope of services results in higher retail cost, greater supermarket chain-level demand but lower price elasticity, and enhanced market power, all leading to higher milk prices and quantity of milk sold. However, unlike previous research, we conclude that increases in cost rather than market power explain most of the ensuing price increases.

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File URL: http://fmpc.uconn.edu/publications/rr/rr94.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 094.

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Length: 35 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:zwi:fpcrep:094

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Web page: http://www.zwickcenter.uconn.edu
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Keywords: retailing; service; pricing; milk; market power; competition;

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References

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  1. Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2004. "Retail Oligopoly Power, Dairy Compact, And Boston Milk Prices," Research Reports, University of Connecticut, Food Marketing Policy Center 25212, University of Connecticut, Food Marketing Policy Center.
  2. Cotterill, Ronald W. & Dhar, Tirtha Pratim, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Research Reports, University of Connecticut, Food Marketing Policy Center 25189, University of Connecticut, Food Marketing Policy Center.
  3. Lars-Hendrik Röller & Robin C. Sickles, 1997. "Capacity and Product Market Competition: Measuring Market Power in a "Puppy-Dog" Industry," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) FS IV 97-31, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  4. Ellickson, Paul B., 2006. "Quality competition in retailing: A structural analysis," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 24(3), pages 521-540, May.
  5. Howard Smith, 2004. "Supermarket Choice and Supermarket Competition in Market�Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(1), pages 235-263, 01.
  6. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-86, December.
  7. Shepard, Andrea, 1991. "Price Discrimination and Retail Configuration," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(1), pages 30-53, February.
  8. 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, Agricultural and Applied Economics Association, vol. 88(3), pages 710-726.
  9. Rajiv Lal & Ram Rao, 1997. "Supermarket Competition: The Case of Every Day Low Pricing," Marketing Science, INFORMS, INFORMS, vol. 16(1), pages 60-80.
  10. Rigoberto Lopez & Azzeddine Azzam & Carmen Lirón-España, 2002. "Market Power and/or Efficiency: A Structural Approach," Review of Industrial Organization, Springer, Springer, vol. 20(2), pages 115-126, March.
  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. Roger Betancourt & David Gautschi, 1990. "Demand Complementarities, Household Production, and Retail Assortments," Marketing Science, INFORMS, INFORMS, vol. 9(2), pages 146-161.
  13. 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.
  14. 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.
  15. 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.
  16. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
  17. Ronald W. Cotterill & Tirtha Pratim Dhar, 2003. "Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel," Food Marketing Policy Center Research Reports, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy 074, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  18. Bliss, Christopher, 1988. "A Theory of Retail Pricing," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 375-91, June.
  19. Jean Kinsey & Ben Senauer, 1996. "Consumer Trends and Changing Food Retailing Formats," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(5), pages 1187-1191.
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Citations

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Cited by:
  1. 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, European Association of Agricultural Economists;Agricultural and Applied Economics Association 116437, European Association of Agricultural Economists;Agricultural and Applied Economics Association.
  2. Stephen Martin, 2012. "Market Structure and Market Performance," Review of Industrial Organization, Springer, Springer, vol. 40(2), pages 87-108, March.
  3. 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, Agricultural and Applied Economics Association 123196, Agricultural and Applied Economics Association.
  4. 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.
  5. Widenhorn, Andreas & Salhofer, Klaus, 2012. "Price sensitivity within and across retail formats," Congress Papers, Italian Association of Agricultural and Applied Economics (AIEAA) 124108, Italian Association of Agricultural and Applied Economics (AIEAA).

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