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Intra- and Inter-Format Competition in Grocery Retailing Catherine Ball ESRC Centre for Competition Policy University of East Anglia 20/02/09.

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Presentation on theme: "Intra- and Inter-Format Competition in Grocery Retailing Catherine Ball ESRC Centre for Competition Policy University of East Anglia 20/02/09."— Presentation transcript:

1 Intra- and Inter-Format Competition in Grocery Retailing Catherine Ball ESRC Centre for Competition Policy University of East Anglia 20/02/09

2 Introduction –Research questions –Literature Econometric model –Methodology –Data Results Conclusions Further work Outline of Presentation

3 Research Questions/Literature How effective are small supermarkets and specialist stores at providing a competitive constraint to large supermarkets? –Several CC/OFT studies make the assumption that larger supermarkets constrain smaller supermarkets but not vice versa. Cleeren et al (2008) show that discounters can constrain supermarkets in Germany. Which type of supermarkets (small, urban or large,out-of-town) are the most harmful to the existence of specialist stores? –Smaller, town-centre supermarkets might be less harmful to specialist stores – increase footfall. Is it useful to measure variation in product range, both in terms of range of product categories and range within categories, in a two dimensional product space? –Increased scope for product differentiation decreases competitive pressure in a market Seim (2006) – could this extend to differentiation in product range carried?

4 Market Summary Large supermarkets –4 major players Tesco (supermarket and Extra formats) (27.6% all formats) ASDA (14.1%) Sainsbury (supermarket format) (13.8% all formats) Morrisons (9.9%)

5 Market Summary Large supermarkets –4 major players Tesco (44,000) ASDA (65,000) Sainsbury (26,000) Morrisons

6 Market Summary Smaller supermarkets/convenience stores –Main players CGL/Somerfield (3.8 and 3.9% respectively 2007) Waitrose (3.3%) M&S (3.8%) Tesco (Express and Metro formats) (27.6% all formats) Sainsbury (Local and Central formats) (13.8% all formats) Budgens Iceland (1.5%) Aldi/Lidl (2.8% combined) Others (15.5%)

7 Market Summary Smaller supermarkets/convenience stores –Main players CGL/Somerfield (15,201 – CGL only) Waitrose (24,500) M&S (5,000 – food only) Tesco (Express and Metro formats) Sainsbury (Local and Central formats) Budgens (6,600) Iceland (3,420) Aldi/Lidl Others

8 Market Summary Specialist stores –Main types: Fishmongers Greengrocers Butchers Bakers Off-licences

9 Multiproduct Firms Most retailers are multiproduct firms: Two issues- –Internalisation of agglomeration effects (Shaked and Sutton, 1990) Expansion effect Lower for specialist stores –Product differentiation in range? Reduces competitive pressure

10 Large vs. Small Supermarkets One-stop vs. Top-up shopping Out-of-town vs. Town centre location Large supermarkets have a wider range both within and across(?) categories than a smaller supermarket. Parking, other facilities Price flexing and PQRS

11 Supermarkets vs. Specialists Supermarkets internalise agglomeration effects of providing a range of products, a group of independent specialists does not (Hay and Smith, 2005) Specialists offer expert advice Specialists have a wider within category range(?) Supermarkets have more categories Perceived higher quality

12 Methodology Multiple-entrant qualitative response model Cross-sectional data Limited to pairwise comparisons –At present limited to comparisons where dependency between firms is only in one direction Eg small supermarkets profits depend on number of large supermarkets but not vice-versa

13 Methodology The profits of a particular type of supermarket, k where k = 1, 2 are given by: –Where S is market size (population and nearby population), X is a vector of demand/cost variables that affect firm profitability within a market.

14 Methodology Assuming that large supermarkets constrain small supermarkets (but not vice versa). The latent profits are given by: A firm of a particular type will enter market i when:

15 Methodology Latent profits are unobserved, but if ε are i.i.d. bivariate normal, the observed number of stores of each type, N k (k=L,S) can be estimated using a simultaneous equation bivariate ordered probit model. N L and N S are observed such that:

16 Methodology Therefore the probability of observing N L =j and N S =k in market i is: Assuming ε are bivariate standard normal with correlation parameter ρ, this corresponds to a simultaneous equation bivariate probit model with one endogenous regressor.

17 Note: There are several special cases nested within this model: γ=0 (coefficient on endogenous regressor) – seemingly unrelated model ρ=0, univariate probit model

18 Sample Markets Aggregate postcode districts (e.g. NR1, NR2) into postal towns (e.g. Norwich). Vary in population from 142 (St. Martins, Isle of Scilly) to 1,015,043 (Birmingham). Each London borough is classified as a separate postal town. 1239 postal town markets

19 Sample Markets - filtering Why filter? –Isolated markets –Partial and sub-markets –Categorisation of number of firms Cleeren et al (2007) filtering rule: –Exclude markets where pop 25,000 Bresnahan and Reiss (1991) filtering rule: –Exclude markets within 20miles of a town with pop>1,000 –Exclude markets within 100miles of a town/city with pop>100,000 My filtering rule: –Exclude markets within 20miles of a town/city with pop>150,000 –Exclude markets where pop 75,000

20 Sample Markets - filtering VariablesAll marketsSample markets MeanS.D.MinMaxMeanS.D.MinMax POP (1000)42.14972.0890.1421,015.04314.89013.3053.01473.776 %EMPLOY0.4420.05300.7390.4260.0430.2670.594 OVER640.1760.05000.4040.2080.0490.0450.384 BUTCHERS4.3850.22401382.7462.438014 BAKERS4.4228.2470902.4982.643018 GREEN1.3902.8010370.8781.11206 FISH0.6411.2940130.7221.30809 OFFLICENCE4.43139901330.9464.706026 LARGE----1.4481.54106 SMALL10.21320.80203383.3732.965013

21 Large supermarkets Defined as the following fascias of the big four –Tesco (Supermarket and Extra formats) –ASDA (All stores) –Sainsbury (Supermarket format) –Morrisons (All stores) Counted in a postal town if it is within 15mins drive of the centre.

22 Small supermarkets Defined as: –All non-big four supermarkets I.e. Somerfield/Co-op, M&S, Waitrose, Budgens –All non-big four convenience stores –Tesco (Express and Metro formats), Sainsbury (Local and Central formats) Counted in a postal town if in one of the postcode districts that comprise the postal town.

23 Specialists Specialist stores included: –Butchers (5449) –Bakers (5505) –Offlicences (5539) –Greengrocers (1733) –Fishmongers (790) Counted in a postal town if in one of the postcode districts that comprise the postal town.

24 Other Data Market size given by population Control variables – percentage employed, age Instruments –For large supermarkets – percentage of car owners

25 Final specification Profits of a large supermarket are given by: Profits of a small supermarket are given by:

26 LARGESMALL VariableCoefficientVariableCoefficient lnPOP0.739lnPOP0.557 Employ2.582Employ-2.743 Over64-0.498Over64-2.505 Spec1-0.197Spec1-0.340 Spec2-0.669Spec2-0.532 Spec3-0.705Spec3-0.814 Spec4-0.575Spec4-0.444 pcarowner3.339large-0.585 Cut1-1.138Cut1-2.212 Cut2-0.223Cut2-1.730 Cut30.456Cut3-1.487 Cut40.892Cut4-1.265 Cut51.254Cut5-1.132 Cut61.837Cut6-0.995 Cut7-0.846 Cut8-0.733 Cut9-0.628 Cut10-0.516 Wald test of independent equations (rho=0) 2.73 Wald test 139.73 Red, orange and yellow indicate significance at the 1%,5% and 10% level respectively. Red indicates significant difference to the preceding cut-point at 1% level.

27 Conclusions Evidence that large and small supermarkets entry decisions are strategically linked and jointly determined. Some weak evidence that, for large supermarket, competitive pressure increases with additional entry. Some weak evidence that an agglomeration of three different types of specialists has an impact on the profitability of small supermarkets but no effect on large supermarkets.

28 Extensions Jointly determine whether small and large supermarkets are strategically dependent (two endogenous regressors) Endogenise specialist entry Analyse affect of barriers to entry affecting large supermarkets Model product range as two-dimensional product differentiation. Change order of game.

29 Extensions Model product range as two-dimensional product differentiation. Small supermarkets Specialists Large supermarkets Range within categories Range across categories


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