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Market Structure and Pricing in Food Markets

Paper Session

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

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

Rural Food Retailing and Independent Grocery Retailer Exits

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

Abstract

We investigate the food retailing landscape and the exit of independent grocery stores in rural America using U.S. NETS data. Our paper makes several novel contributions that could potentially help the agenda for future research and public policy. We begin by documenting local concentration trends in food retailing and how they change across rural and urban markets from 1990 to 2015. Then, we conduct two event studies to examine how entry by a large chain is associated with the local market concentration and independent grocery retailer (IGR) exits. Lastly, we document the IGR exit rate in rural markets for a period of twenty-five years and investigate the correlates of the exit rate in a regression framework. Our results show that concentration in food retailing has increased since 1990, but the increasing trend after the Great Recession of 2008 is particularly noticeable. The local concentration differs substantially by the urban status of markets. Focusing on rural markets, we show that entry by a large food retailer is associated with higher market concentration and the decreasing number of IGRs. We also find that the annual average IGR exit rate is around 6.6 percent during the study period. The IGRs that are younger, that operate in relatively more competitive markets, and that face entry by a large chain, are more likely to exit. Also, IGR rates are higher in markets with lower median income and higher poverty rates. We discuss how our results can potentially inform policies on sustainable rural development, food access, and food insecurity in rural communities.

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 Differentiation and Market Power in Input Procurement: Evidence from a Structural Model of the Corn Market

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

Abstract

We estimate the degree of spatial differentiation among downstream firms that buy corn from upstream farmers and examine whether such differentiation affects competition and enables buyers to exert market power, defined as the ability to pay a price for corn that is below its marginal value product net of processing cost. We estimate a structural model of spatial competition using corn procurement data from the U.S. State of Indiana over 2004-2014. We adopt a strategy that allows us to estimate firm-level structural parameters while using aggregate data. Our results return a transportation cost of 0.12 cents per bushel per mile (5% of the corn price under average distance traveled), which provides evidence of spatial differentiation among buyers. The estimated average markdown is $0.80 per bushel (16% of the average corn price in the sample), of which $0.34 is explained by spatial differentiation and the rest by the fact that firms operated under binding capacity constraints. We also find that corn prices paid to farmers at the mill gate are independent of distance between the plant and the farm, providing evidence that firms do not engage in spatial price discrimination. Finally, we evaluate the effect of hypothetical mergers on input markets and farm surplus. A merger between nearby ethanol producers eases competition and increases markdowns by 20% and triggers a sizable reduction in farm surplus. In contrast, a merger between distant buyers has little effect on competition and markdowns.

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