Competition in grocery sales
Aggressive pricing combined with a limited selection of goods and minimalist design are some of the key competitive strategies of discount supermarkets. Discounters, such as Lidl, operate to offer 40-60% lower prices than conventional retailers, but how much of a competetitive threat to they pose to supermarket giants?
The authors of DP6964 have based their study on an empirical entry model, with data from the national origin of discounters, Germany, to investigate this question. In addition to analysing "inter-format" competition between traditional supermarkets and discounters, Verboven et al. also examine the competitive effect between retailers of a similar kind and the effects that local conditions, such as demographics, can have upon the success of the two formats.
While their results show that conventional retailers operate in a fierce competitive battle with each other from the first entrant onwards, they find that supermarkets only start experiencing a significant competitive effect from discounters after the arrival of the third discounter in the market. This could be explained by supermarkets being able to focus on the more profitable, price-insensitive segment when the first discounter arrives, but then suffering from increasing price-sensitivity across all products and brands as more discounters enter the market.
These results may go some way to explaining why the managers of conventional supermarkets are so keen to develop discounter format outlets, provided of course that theirs is the brand that develops first.
Summary by CEPR staff
Topics: Frontiers of economic research