Retail Market Power in a Shopping Basket Model of Supermarket Competition

Supermarket consumers typically purchase more than one item at a time. Modeling demand relationship among items in consumers’shopping baskets is therefore essential to understanding how retailers set prices. To date, models of price competition among retailers typically assume consumers make discrete choices among categories in the store or derive utility from independent goods that is una¤ected by basket composition. In this paper, we develop a model of price competition among retailers that explicitly models the e¤ect of complementary demand relationships among items in consumer shopping baskets. We derive inferences for market power under complementary categories and compare outcomes with the prediction of models that assume discrete choice among independent categories. We show that complementarity generates substantially greater pricing power for retailers than independent goods, resulting in less competitive behavior. Richards is Professor and Morrison Chair of Agribusiness, Morrison School of Agribusiness, W. P. Carey School of Business, Arizona State University; Hamilton is Professor, Department of Economics, Orfalea College of Business, California Polytechnic State University San Luis Obispo; Yonezawa is Post-doctoral researcher, Technical University of Munich, Munich, Germany. Contact author, Richards: Ph. 480-7271488, email: [email protected]. Copyright 2015. Users may copy with permission. Support from the Agricultural and Food Research Initiative of the National Food and Agriculture Institute, USDA, is gratefully acknowledged.