Analysis Of Competition Policy And Sectoral Regulation, The

Martin Peitz, Yossi Spiegel

• Publisher: WSPC
• Year: 2014
• ISBN:
  9789814616379
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

This volume contains a selection of papers that were presented at the CRESSE Conferences held in Chania, Crete, from July 6th to 8th, 2012, and in Corfu from July 5th to 7th, 2013. The chapters address current policy issues in competition and regulation. The book contains contributions at the frontier of competition economics and regulation and provides perspectives on recent research findings in the field. Written by experts in their respective fields, the book brings together current thinking on market forces at play in imperfectly competitive industries, how firms use anti-competitive practices to their advantage and how competition policy and regulation can address market failures. It provides an in-depth analysis of various ongoing debates and offers fresh insights in terms of conceptual understanding, empirical findings and policy implications. The book contributes to our understanding of imperfectly competitive markets, anti-competitive practices and competition policy and regulation.

Contents:

• Competition:
  • Market Consolidation and Pricing Developments in Grocery Retailing: A Case Study (Ratula Chakraborty, Paul W Dobson, Jonathan S Seaton and Michael Waterson)
  • The Price Effects of Mergers in Airline Networks (Kai Hüschelrath and Kathrin Müller)
  • Pattern Asymmetry in the Pass-Through of Input Price Shocks in the Road Fuels Sector: New Evidence on the United Kingdom (Enrico Pesaresi, Conor Flanagan and Boryana Miteva)
  • Better Product at Same Cost: Leader Innovation vs Generic Product Improvement (David J Balan and George Deltas)
  • Industry Structure and Pricing Over the Business Cycle (Yossi Spiegel and Konrad Stahl)
  • Price Competition between Platforms: The Case of eBay vs.Yahoo! Auctions (Stefan Behringer)
• Anticompetitive Practices:
  • Cartel Sales Dynamics when Monitoring for Compliance is More Frequent than Punishment for Non-Compliance (Joseph E Harrington, Jr and Juan-Pablo Montero)
  • Exploitation and Induced Tacit Collusion: A Classroom Experiment of Corporate Leniency Programs (Jeroen Hinloopen and Adriaan R Soetevent)
  • Quantity Discounts and Market Power: The Michelin Case Revisited (Liliane Giardino-Karlinger)
  • Technology Transfer, Contracting, and Product Market Competition (Frago Kourandi, Sabina Sachtachtinskagia and Nikolaos Vettas)
• Competition Policy and Regulation:
  • How Can Competition Policy and Competition-Policy Economics Contribute to Solving the Healthcare Crisis? (Michael L Katz)
  • Regulation Mismatch in Tackling CO 2 Emissions (Claude Crampes)
  • Public Policies in Investment-Intensive Industries (Giovanni Immordino and Michele Polo)
  • The Role of Legal Principles in the Economic Analysis of Competition Policy (Harold Houba, Evgenia Motchenkova and Quan Wen)
  • Deterrence in Competition Law (Paolo Buccirossi, Lorenzo Ciari, Tomaso Duso, Giancarlo Spagnolo and Cristiana Vitale)
  • The Risks and Tricks in Public–Private Partnerships (Elisabetta Iossa, Giancarlo Spagnolo and Mercedes Vellez)

Readership: Young researchers and doctoral students looking for new avenues and possibilities for future research; researchers looking for up-to-date treatment of a number of key competition issues; general public practitioners interested in analyzing competition policy.

Part I

Competition

Chapter 1

Market Consolidation and Pricing Developments
in Grocery Retailing: A Case Study*

Ratula Chakraborty

University of East Anglia

[email protected]

Paul W. Dobson

University of East Anglia

[email protected]

Jonathan S. Seaton

Loughborough University

[email protected]

Michael Waterson

University of Warwick

[email protected]

Abstract

When large retailers merge, there is a concern that a sudden and marked increase in concentration will alter the intensity and nature of price competition to the detriment of consumers. This chapter considers just such a situation in regard to UK grocery retailing, which has witnessed steadily increasing concentration over recent years, advanced by a series of mergers. Specifically, we examine the nature of price competition amongst the major “one-stop-shop” retail chains before, during, and after the Safeway/Morrison merger in March 2004. We find the merger offered consumers an immediate windfall benefit — with average prices falling straight after the merger — and more intriguingly appears to have led to (or at least is associated with) a marked change in the character of price competition in the market.

Keywords: Price competition, concentration, pricing strategies, grocery retailing.

JEL Classification Codes: L40, L81, L11.

1. Introduction

Prices in the UK grocery sector fell in real terms by 7.3% in the early 2000s (Office of Fair Trading, 2006). Yet, over the same period, concentration increased sharply, with the top four UK supermarket retailers increasing their joint share from approximately 60% to 75%. Doubtless, costs might have been lowered through scale efficiencies, improved organization, and the exercise of buyer power. Even so, the falling prices may be symptomatic of changes taking place in regard to how retailers compete, and in particular, the pricing strategies that they employ, and not merely to do with passing on cost savings. To analyze this, we investigate pricing strategies with particular reference to a large merger.At issue is whether a change in market structure can fundamentally change market behavior in an unanticipated, but in this case apparently beneficial, manner with implications for evaluating future scenarios of how market outcomes might evolve post-merger.

This chapter explores this issue using a balanced panel sample from a novel dataset that covers prices for a wide range of grocery and household products across all four major supermarket chains jointly accounting for over 90% of the UK one-stop shopping grocery retail market (defined in the UK as grocery sales from stores greater than 1,400 sq. m). The dataset used is based on weekly-updated price data on individual items covering the period from November 2003 to November 2006, during which time, there was significant change in the structure of the market, the completion of the Safeway/Morrison (hereafter, S/M) merger in March 2004, consolidating the position of the fourth player. Otherwise, this time period is characterized by the macroeconomically benign environment of growth and mild inflation now called the Great Moderation. For the period investigated, we find a strong incidence of net price reductions. The evidence suggests that the primary driver of falling prices during this period has been higher priced firms cutting prices (rather than lower priced firms cutting prices further) as they shifted from traditional high-low (“HiLo”) promotional-based pricing toward value-oriented every-day low pricing (“EDLP”), whilst retaining promotional elements — a hybrid strategy that all four major players appear to have adopted to a greater or lesser extent by the end of the period studied.¹

For this market, a move toward price convergence is associated with a change in the character of price competition triggered by increased concentration and an intensifying battle for market share.Yet, the real price reductions overall mask a more complex picture of price changes, with many falls at the same time as substantial increases in prices on other products.

Viewed in policy terms, this era may have an important bearing on how competition authorities should view retail mergers, with the need to distinguish those likely to promote a shift toward more intense, rather than less intense, competition to the benefit of consumers. The UK competition authorities were faced with four possible merger scenarios, out of which they chose one (with relatively minor restrictions regarding the small number of areas where the merging parties overlapped significantly). The short-term indications are that they got this right, in the sense that the other possible mergers would have led to a more asymmetric concentrated structure and an outside firm is likely to have found greater difficulty in delivering cost reductions.

There remains a lingering concern that as the post-merger market settles, and positions stabilize, then competitive intensity may wane, leading to the prospect of future price rises. Yet, at least for the period studied here, examined purely in terms of the impact on consumer welfare through effects on prices, our analysis provides support for the arguments made by the UK competition authorities in allowing the S/M merger (rather than the other contemplated mergers) in an already quite concentrated market. Our sample suggests that consumers saw an immediate windfall benefit from the merger — with price cuts across a wide range of products following completion of the merger; although, we establish close correlation in timing, this is clearly not the same as establishing causation.²

Beyond the rapid post-merger drop in prices, we also find evidence that the nature of price changes and competitor responses changed more generally over the period. In particular, leader–follower patterns and response timings appear to have shifted as the price gap narrowed across the main retailers. Indeed, there is evidence of asymmetric leader–follower positions, with one retailer tending to lead on price rises while another retailer tends to lead on price falls.We also find that, while an increasing number of products were identically priced across all the main retailers, even where price gaps remained, they were often as small as a single penny across the four retailers. A significant proportion of the price changes, particularly decreases, were a single penny, indicating a willingness to pass on lower costs and/or seeking to gain or maintain the lowest price position (and thus enhance their reputation with consumers) — and suggesting low menu costs.

The chapter is organized as follows. In Section 2, we briefly review developments in the UK grocery sector, examining changes in market concentration and the nature of the leading players in the “one-stop shopping” market. In Section 3, we discuss the source and nature of the pricing data used. In Section 4, we assess the four main retailers’ price change decisions in terms of patterns over time (particularly in view of the S/M merger, examining average prices, direction and magnitude of price changes, and the extent of price alignment across the retailers), patterns across product types, and evidence of leader–follower behavior. Section 5 concludes the chapter.

2. UK Grocery Retailing and One-Stop Shopping

Grocery retailing is significantly the largest retail sector in the UK. Total sales through UK grocery outlets were around £120 billion (approximately $200 billion) in 2005 (Office of Fair Trading, 2006). Of this total, around £95 billio...

Table of contents

• Cover
• Half Title
• List of Books
• Title Page
• Copyright
• Contents
• About the Editors
• About the Contributors
• Introduction
• Part I: Competition
• Part II: Anticompetitive Practices
• Part III: Competition Policy and Regulation
• Index