Sexton, R., J. Chalfant, H. Wang, and M. Zhang. Grocery retailer pricing and its effects on producers: evidence for California fresh produce.

1 - Food Retailers becoming dominant - mergers and acquisitions

C4 = 28% in 1999 (national retail level)

More concentrated in large urban areas ( 70% market share)

Question:

Is concentration an indicator of the abuse of market power?

2. Increasing concentration motivated this research:

Evaluate the impact on the welfare of consumers, Less attention to growers/shippers

3. Proportion of produce sold direct by grower-shippers to retail is increasing

Traditional wholesale and terminal markets becoming less important, tending to serve smaller retailers, and food service companies

e.g. Marche Central (Montreal), Ontario Food Terminal (Toronto)

- markets are becoming less fluid (residual market)- less liquid, with increasing transactions costs

Analysis

Produce: iceberg lettuce, bagged salads, tomatoes, grapes

Pricing Behaviour as Evidence of Market Power

1) Violations of the law of one price2) Asymmetric pricing behaviours (up versus down)3) Lack of coordination in price movements at different levels of the system4) Lack of coordination between retailers

Data: weekly store level prices (retail)sample of Metropolitan Statistical Areas (MSA’s) 20-24 chains depending on the product

Question: Is there evidence of non-competitive pricing behaviour ?

Evidence:

Table 2: correlation analysis FOB prices and prices for 4 chains in Los Angeles

Law of one price. => prices NOT the same across geographic regions, but correlated

Market competitive?=> prices across chains should be closely correlated.

Question: why should that be?

Evidence/Results of Analysis:

(1) Positive correlation to FOB for head lettuce but the correlations are fairly small.

Suggests that retail pricing is probably not simply a mark-up

(2) almost no correlation between FOB and bagged salad prices

(3) very low correlations among stores in their retail pricing

Except for Head Lettuce,

no evidence of coordinated pricing between stores >

They are pricing quite independently

NOT price takers

Evidence/Results of Analysis:

Question: Is evidence sufficient to conclude non-price taking behaviour ?

Caveats - did not investigate prices PAID by retailers, only selling price >

We do not know what price they paid

FOB = prices in terminal markets; perhaps different from what they are payingForward contracts

Figure 1: FOB lettuce prices

Figure 1: FOB lettuce prices

Shows price variability over the two year time period

Harvest cost – cost of harvesting, packing and marketing

Price generally above the cost of delivering the lettuce

Everyday pricing Strategy

6 of the 20 stores they monitored maintained the same price for 2 years, despite the high volatility of the FOB farm price

=> other parts of the market must adjust so that markets clear retail quantity demanded will not be adjusting retail price not rationing demand

Other evidence (Figure 2) - Grapes

Flat pricing indicated, at least for the Chicago chain.

Price Spread Analysis

Purpose: Marketing margin affected by shipping costs or harvest volume?

PS = f(shipping cost per unit, harvest volume, trend)

Econometric model

Examine price spreads for a number of chains for lettuce, tomatoes and grapes

RESULTS: (Price Spreads)

(1) retailers are exercising market power for tomatoes(2) insensitive to changes in transport costs (3) tends to widen when there is ample supply

Grapes: size of harvest did not impact the price spread

can be stored

Discussion - final points

Supermarket pricing strategies

Single products versus profitability of the storeProduce - high marginsDiscounts to attract customers

Farm-retail price spreads - highly variableBroken link - farm gate price and retail specials

Important indicator (market power)

Price spreads widened during periods of surplus