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

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

By
Stephan Seiler, Øyvind Thomassen, Howard Smith, Pasquale Schiraldi
American Economic Review (forthcoming). March
2017

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.