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

Aug 2017

American Economic Review, Vol. 107, No. 8

DOI: https://doi.org/10.1257/aer.20160055

Øyvind Thomassen, Howard Smith, Stephan Seiler, Pasquale Schiraldi

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.

Department Author

Howard Smith


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