Recipient Organization
USDA/ERS
1800 M STREET NW
WASHINGTON,DC 20036
Performing Department
ECONOMIC RESEARCH SERVICE
Non Technical Summary
We examine how mergers between supermarket chains affect the price of food items. Merger may cause an increase in market power and hence an increase in prices. Or, mergers may create efficiencies between merging firms, which may lead to lower prices. This project intends to identify how prices changed after firms merged.
Animal Health Component
100%
Research Effort Categories
Basic
0%
Applied
100%
Developmental
(N/A)
Goals / Objectives
Measuring the price effects of mergers is an important empirical question in industrial organization because mergers offer the possibility for counteracting effects. Mergers may increase the market power of the new entity and result in higher prices for the good or service being offered. On the other hand, mergers may result in a more efficient, lower-cost entity and with sufficient competition from rivals, lead to lower prices. The empirical question in the supermarket industry seems especially intriguing. Mergers among some of the nationas largest food retailers have left the industry with a few retailers with large shares of the national market and created concerns about competitiveness. However, competition between food retailers is largely local and local market shares have not been as dramatically affected as national shares. While a merger may change local market competition as the strategic game played between local chains changes, such changes cannot be
approximated by changes in market concentration levels.
Project Methods
In this paper, we examine the relationship between supermarket mergers and local food prices. We recognize that mergers can have two important effects. Many supermarket chains operate as multi-market firms frequently having a presence in several metropolitan areas. Because regulatory authorities usually do not allow mergers between chains that have substantial market overlap, a merger between chains increases the number of markets the acquiring chain services. If the new chain can service the new markets at a lower cost than could the previously separate chains, then the merger creates efficiencies that may translate into price decreases. This seems to be the primary argument chains use to justify mergers to regulatory authorities. On the other hand, the markets in which supermarkets operate can be highly concentrated. Chains undoubtedly use merger as a way to grow and enter desirable markets. Because local markets are likely not perfectly competitive, the
degree of local market competition is likely to affect whether efficiencies translate into price decreases. We use a special data set of supermarket scanner data of item prices to empirically examine whether mergers are associated with lower food prices. Our approach is different from other merger studies because we examine multi-market retailers. As a multi-market firm increases the number of markets it services on a national scale, then efficiencies may allow for price decreases. We also recognize that food prices are also determined by local market conditions including local costs, demand, and competition, and that local competitive conditions may change after a merger. Finally, we examine whether effects are different for nationally branded products when compared to private-label (store-brand) products.