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Market Structure and Pricing in Food Markets

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM

Manchester Grand Hyatt San Diego, Mission Beach A
Hosted By: Agricultural and Applied Economics Association
  • Chair: Stephen Hamilton, California Polytechnic State University-San Luis Obispo

Food Retailing in Rural America: Growth of National Chains and the Viability of Independent Stores

Metin Cakir
,
University of Minnesota
Clare Cho
,
USDA Economic Research Service
Xiangwen Kong
,
University of Minnesota

Abstract

This paper examines the food retailing landscape in rural U.S. markets. Rural America has seen the most substantial decrease in independent grocery stores while the numbers of national grocery store chains, convenience store chains, and dollar store chains have increased. We focus on the growth of store types and investigate the effect of national chain store entry on the number and size of independent stores. We use the National Establishment Time Series data, which contains information on sales, employment, and location of all food retailer establishments between 1990 and 2015. We find a negative correlation between the entry of national food retailers and the number of independent grocery stores in nonmetropolitan areas, while in metropolitan areas the correlation is positive. In addition to national chain entry, changing demographics are among the factors that impact the performance and economic viability of independent retailers. The implications of the results for rural communities and public policy are discussed.

The Effect of Competition on Pricing and Product Positioning: Evidence from Wholesale Club Entry

Christoph Bauner
,
University of Massachusetts
Emily Wang
,
University of Massachusetts-Amherst

Abstract

This paper empirically examines incumbents’ reactions to market entry along price and non-price dimensions in the example of wholesale warehouse entry into grocery retail markets. Leveraging a detailed retail panel spanning 2001-2011 and a novel dataset documenting opening and closing
dates and locations of all Costco warehouse clubs, we classify incumbent retailers’ strategic responses (e.g., pricing, assortment) by the storability of product categories, controlling for any persistent systematic differences across retailer-product combinations. We find that retailers are substantially affected by increased competition from wholesale club entries and increase their adoption of the high-low pricing strategy in response. In addition, incumbent retailers’ strategic responses differ significantly across storability levels: they are more likely to increase prices and reduce assortments for highly storable products and decrease prices and increase assortments for less storable products. We extend our analysis by exploiting the spatial variations in our data and analyzing divergent market effects across geographical areas. We find significant geospatial differences in these strategic responses.

Spatial Competition and Pricing in Agricultural Procurement Markets: Evidence from the Corn Market in Indiana

Jinho Jung
,
Purdue University
Juan Sesmero
,
Purdue University
Ralph Siebert
,
Purdue University

Abstract

The ability for food processors to depress farm prices in increasingly geographical localized and concentrated agricultural procurement markets has long concerned regulators and researchers.
In this paper we estimate firm-level structural parameters with spatially disaggregated market-level data and quantify price deviations from a frictionless benchmark. We focus our analysis on corn procurement in the State of Indiana, where we observe substantial longitudinal and cross-sectional variation in market structure in the 2004-2014 period. We develop and estimate an oligopsony-competitive fringe structural model of spatial competition for corn procurement. Our results suggest that, on average, corn ethanol plants and food wet-milling plants price corn below its marginal value product, but do not engage in spatial price discrimination. All else constant, spatially isolated plants attain larger markdowns, with smaller plants attaining larger markdowns. Consistent with this observation, estimated spatial pricing and procurement patterns suggest a Kreps and Scheinkman-type of market structure in which binding capacity constraints deliver a certain degree of localized market power to otherwise weakly differentiated Bertrand-pricing buyers. Counterfactuals reveal that consolidation increases markdown behavior when it takes place between plants located nearby, and this is true for both consolidating and non-consolidating plants. Our findings underscore the implications of the spatial pattern of consolidation for efficiency.

Food Waste, Food Banks, and Damaged Goods

Timothy Richards
,
Arizona State University
John Lowery
,
Ohio State University
Stephen Hamilton
,
California Polytechnic State University-San Luis Obispo

Abstract

Food banks are an important part of the food-retail setting. In 2018, food banks delivered a total of 1.4 billion pounds of food to 51.4 million consumers, serving as an important outlet for food that would otherwise be discarded in landfills or composted. Yet, despite the economic and social importance of food banks, we know very little of their economic role in food distribution. In this paper, we explain the existence of food banks as an essential mechanism of the food-retailing industry that allow food retailers to engage in price-discrimination between high-valuation consumers who visit their stores, and low-valuation consumers who do not. Donating to food banks allows retailers a mechanism to avoid offering selective promotions for fresh products that would otherwise serve to soften retail price competition, provides an outlet for fresh produce that is over-ordered to hedge against stock-outs, and generates write-offs that raise after-tax profits of retailers. We demonstrate how secondary markets for perishable food products have the potential to improve profitability, and we test the implications of our model using a unique data set that combines fresh produce sales with food bank donations by retailers. We demonstrate that retailers that take advantage of secondary markets for perishable food earn higher profits than those that do not, a finding that helps explain the co-existence of traditional food retailers and food banks.
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance