Multi-Category Competition and Market Power: A Model of Supermarket Pricing

Multi-Category Competition and Market Power: A Model of Supermarket Pricing

By
Øyvind Thomassen, Howard Smith, Stephan Seiler, Pasquale Schiraldi
American Economic Review. August
2017, Vol. 107, Issue 8, Pages 2308-2351

In many competitive settings consumers buy multiple product categories, and some prefer to use a single firm, generating complementary cross-category price effects. To study pricing in supermarkets, an organizational form where these effects are internalized, we develop a multi-category multi-seller demand model and estimate it using UK consumer data. This class of model is used widely in theoretical analysis of retail pricing. We quantify cross-category pricing effects and find that internalizing them substantially reduces market power. We find that consumers inclined to one-stop (rather than multi-stop) shopping have a greater pro-competitive impact because they generate relatively large cross-category effects.