Until the mid-20th century, U.S. consumers shopped for groceries mostly at specialty shops that offered single product lines, such as meat, vegetables, or dairy goods. That changed with the advent of large supermarkets and the allure of one-stop shopping.
But has that been a good thing for consumers when it comes to pricing?
In a word, yes, according to new research by Stanford Graduate School of Business professor Stephan Seiler. Having multiple product categories at supermarkets benefits buyers, because the sellers recognize that raising prices in any single category might chase shoppers out of their stores, Seiler says.
“If a supermarket increases its price for one category, like dairy, some people leave the supermarket altogether,” he says. “They take their entire basket elsewhere.”
That’s one of the primary findings in a paper titled “Multi-Category Competition and Market Power: A Model of Supermarket Pricing,” which Seiler coauthored with Øyvind Thomassen of Seoul National University, Howard Smith of Oxford University, and Pasquale Schiraldi of the London School of Economics.
“Most of the literature in these areas has focused on estimating demand or consumer behavior in a specific product category,” Seiler says. But his team wanted to measure how bundling grocery-product categories would affect the market power of a given supermarket.
“People worry that it might be negative for consumers that stores like Walmart offer everything in one place,” Seiler says. “But we thought it might actually be pro-competitive, and thus beneficial for consumers, and wanted to test that.”
The Risk of Raising Prices
The researchers studied supermarket pricing and consumer behavior by using data from more than 26,000 Great Britain households over a three-year period beginning in 2002. Specifically, they studied information from home-scan panels that tracked where consumers shopped, what they purchased, and how much they paid.
“How I buy milk shouldn’t affect how I buy detergent,” Seiler says, “but there’s a fixed cost for going out shopping, and it’s lower if I only have to go to one place.”
It may be tempting to think that supermarkets use that fact to their advantage by raising prices with the knowledge that consumers accustomed to shopping at one well-stocked store will be unlikely to switch. But that would be a risky strategy, Seiler says, especially if there are other supermarkets within striking distance.
“People can take all their purchases to another store,” Seiler says. “It’s different from a situation like a merger between rival companies — like OfficeMax and Office Depot — where consumers now have fewer options and there is less of a penalty for raising prices.”
As expected, the researchers found that when categories are “unbundled,” such that the price of one doesn’t affect purchases of another — as was the case before the rise of supermarkets — prices can rise dramatically.
The supermarket pricing benefit for consumers relies not just on the presence of valid competition, but also on shoppers willing to switch to a less expensive store for all of their shopping. “While fewer shoppers tend to move all their purchases elsewhere, the effects on profits of their moving away is magnified,” Seiler says.
The ability of shoppers to substitute purchases across stores has been a question considered by the Federal Trade Commission in antitrust cases, including the proposed merger of Whole Foods with Wild Oats. In that case, the agency sought to block the merger, arguing that consumers who shopped at those retailers wouldn’t have adequate access to other markets if prices rose. “If the relevant market is narrow, a merger can be harmful,” Seiler says.
Seiler says it’s important to understand the dynamics of offering multiple categories because “Western-style” supermarkets are becoming ubiquitous worldwide. Research in this area also has policy implications, such as whether to use zoning restrictions to influence the siting of large retailers.